2007 Ruling 2007-0244561R3 - Withholding Tax Issue

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 loans made to Finco under the 3P Project exempt under subparagraph 212(1)(b)(vii) of the Act?

Position: YES

Reasons: Similar Rulings provided before

XXXXXXXXXX 							2007-024456

XXXXXXXXXX , 2007

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling XXXXXXXXXX ("Finco") BN XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-named taxpayer. In general terms, the transactions described herein involve a project for the XXXXXXXXXX. We also acknowledge information received on XXXXXXXXXX.

We understand that to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the requested ruling is:

(i) dealt with in an earlier return of Finco or a related person;
(ii) being considered by any tax services office or taxation centre in connection with a tax return already filed;
(iii) under objection by Finco or by a related person;
(iv) the subject of a previously issued ruling by the Income Tax Rulings Directorate of the CRA to Finco 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.

Definitions:

Except as otherwise indicated, the following terms have the meanings specified below:

(a) "A Co" means XXXXXXXXXX, an unlimited liability company formed pursuant to the laws of XXXXXXXXXX;

(b) "Account Bank" means the XXXXXXXXXX or such other bank as provided under the Credit Agreement where the Proceeds Accounts and such other accounts from time to time will be opened and held as may be approved by the Agent;

(c) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as amended to the date hereof, and unless otherwise indicated, all references herein to statutory provisions are references to the Act;

(d) "Agent" means XXXXXXXXXX;

(e) "Agreement Commencement Date" means on or about XXXXXXXXXX;

(f) "Agreement Termination Date" means the "XXXXXXXXXX" as provided under the XXXXXXXXXX Agreement;

(g) "Arm's Length" has the meaning assigned by section 251 of the Act;

(h) "Arranger" means XXXXXXXXXX;

(i) "Authority" means the XXXXXXXXXX;

(j) "B Co" means XXXXXXXXXX, an unlimited liability company formed pursuant to the laws of XXXXXXXXXX;

(k) "Banks" means XXXXXXXXXX and the syndicate of other financial institutions that will be formed to make the Credit Facilities available to Finco;

(l) "Base Interest Rate" means an interest rate based on bankers acceptance as quoted on the Reuters Screen CDOR Page for the relevant interest period;

(m) "Bridge Loan" means the credit facility entered into by Holdings LP with a Canadian financial institution;

(n) "C Co" means XXXXXXXXXX a corporation formed under the laws of the Canada Business Corporations Act;

(o) "Change of Control" has the meaning given as of the date hereof to "XXXXXXXXXX" in the XXXXXXXXXX Agreement which shall apply to each of the Credit Parties and is further described in the definition of "Events of Default" at (z)(ii) below;

(p) "Contingency Plan" means a contingency plan satisfactory to the Agent, providing in a timely manner for the replacement or continuance of the Material Entity or remediation by the relevant Material Entity;

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

(r) "Credit Agreement" means the agreement to be entered into among Finco, the Partnership and the Banks outlining the terms and conditions of the Credit Facilities with the Partnership as guarantor;

(s) "Credit Facilities" means the XXXXXXXXXX Credit Facility and the XXXXXXXXXX Facility;

(t) "Credit Party" means Finco and the Partnership;

(u) "DB Contract" means the XXXXXXXXXX agreement to be entered into between the Partnership and the DB Contractor;

(v) "DB Contractor" means the general partnership formed under the laws of the Province of XXXXXXXXXX between XXXXXXXXXX;

(w) "DB Guarantee" means a guarantee on a joint and several basis by the DB Guarantors of the obligations of the DB Contractor under the DB Contract;

(x) "DB Guarantors" means XXXXXXXXXX;

(y) "DB Substantial Completion Deadline" means XXXXXXXXXX, as extended if applicable;

(z) "Debt Service Reserve Account" means a debt service reserve account in the name of Finco or the Partnership funded to an amount equal to scheduled debt service on the XXXXXXXXXX Facility for the next XXXXXXXXXX, which will remain in place as long as the XXXXXXXXXX Facility is outstanding;

(aa) "Events of Default" means various commercial events of default, some of which may be triggered by actions of parties to the Credit Agreement whereas others may be triggered as a result of actions of parties that are not a party to the Credit Agreement, including, but not limited to:

(i) any Material Entity or the Authority is in breach of certain provisions of a Project Contract where a non-curable default arises, or in breach of other obligations thereunder and the effect thereof has a Material Adverse Effect, unless a Contingency Plan is applicable;

(ii) (a) if there is a Change of Control in breach of the terms and conditions of the XXXXXXXXXX Agreement unless otherwise consented to by the Authority; (b) if prior to the Substantial Completion Date, a Credit Party is not controlled directly or indirectly by an entity owned or managed, directly or indirectly, by Manager Group, or unless the Agent has consented (acting on the instructions of the Majority Lenders), such consent not to be unreasonably withheld or delayed;

(iii) an event or circumstances occur which (taken together with any previous event or circumstance) has a Material Adverse Effect;

(iv) an event of default occurs and is continuing under the XXXXXXXXXX Agreement;

(v) insolvency, liquidation or winding up or similar proceedings in respect of any Material Entity which is a party to a Project Contract, in circumstances where such insolvency, liquidation or winding up could reasonably be expected to have a Material Adverse Effect, unless the Partnership procures the execution of a substitute agreement on terms approved by the Agent (acting reasonably);

(vi) termination, suspension, cancellation or revocation of any Project Contract unless a Contingency Plan applies;

(vii) any material consent at such time required to be obtained in order to carry out the Project in accordance with the Project Contracts is not obtained when required or any such material consent ceases to be in full force and effect, or any condition in or relating to any such material consent is not complied with (unless that material consent or condition is no longer required or applicable) and, in any of such cases, such event could reasonably be expected to have a Material Adverse Effect;

(viii) any financial indebtness of any Material Entity, is not paid within any original applicable grace period and such event has a Material Adverse Effect, unless a Contingency Plan is applicable;

(ix) it is or shall become unlawful for any Material Entity to perform or comply with any one or more of its material obligations under any Project Contract (the "Relevant Project Contract" for purposes of this paragraph), or such obligations are not, or cease to be, or are claimed not to be, legal, valid, binding and enforceable, and such matter (or the effects thereof) has a Material Adverse Effect, unless the Partnership has within XXXXXXXXXX days after the earlier of the occurrence of such relevant circumstance and notice thereof being given to the Partnership by the Agent, entered into a substitute agreement to replace the Relevant Project Contract (or the relevant provisions thereof) affected by the illegality, invalidity or unenforceability, with a counterparty, and on terms, approved by the Agent (acting reasonably);

(x) the DB Guarantee is not, or either DB Guarantor claims that the DB Guarantee is not, in full force and effect in accordance with its terms prior to its release or discharge in accordance with such terms or either DB Guarantor gives notice of termination of its guarantee and such guarantee is not replaced by a satisfactory replacement security within XXXXXXXXXX business days prior to the date of termination;

(xi) the OMR Guarantee is not, or either OMR Guarantor claims that the OMR Guarantee is not, in full force and effect in accordance with its terms prior to its release or discharge in accordance with such terms or either OMR Guarantor gives notice of termination of its guarantee and such guarantee is not replaced by a satisfactory replacement security within XXXXXXXXXX business days prior to the date of termination; and

(xii) XXXXXXXXXX;

(bb) "Finco" means XXXXXXXXXX, a corporation formed under the Canada Business Corporations Act with its registered office in the Province of XXXXXXXXXX;

(cc) "Funds" means collectively or any one of XXXXXXXXXX;

(dd) "GAAR" means the general anti-avoidance rule in subsection 245(2) of the Act;

(ee) "Holdings LP" means XXXXXXXXXX, a limited partnership formed pursuant to the laws of XXXXXXXXXX;

(ff) "XXXXXXXXXX Facility" means the XXXXXXXXXX Facility of up to $XXXXXXXXXX to be provided by the Banks to Finco pursuant to the Credit Agreement;

(gg) "XXXXXXXXXX Facility" means the XXXXXXXXXX Facility of up to $XXXXXXXXXX to be provided by the Banks to Finco pursuant to the Credit Agreement;

(hh) "LP A" means XXXXXXXXXX, a limited partnership formed pursuant to the laws of the XXXXXXXXXX;

(ii) "LP Canada" means XXXXXXXXXX, a limited partnership formed pursuant to the laws of the XXXXXXXXXX;

(jj) "LP Int." means XXXXXXXXXX, a limited partnership formed pursuant to the laws of the XXXXXXXXXX;

(kk) "Majority Lenders" means:

(a) if there are no loans outstanding under the Credit Agreement, a Bank or Banks whose commitments aggregate more than XXXXXXXXXX% of the total commitments under the Credit Facilities (or, if the total commitments have been reduced to zero, aggregated more than XXXXXXXXXX% of the total commitments immediately prior to the reduction); or

(b) at any other time, a Bank or Banks whose participation in the loans then outstanding under the Credit Agreement aggregate more than XXXXXXXXXX % of all loans then outstanding under the Credit Agreement;

(ll) "Manager" means XXXXXXXXXX, a corporation formed pursuant to the laws of XXXXXXXXXX or an affiliate thereof;

(mm) "Manager Group" means:

(i) Manager or any of its affiliates;

(ii) any entity managed by Manager or any of its affiliates; and

(iii) any entity where Manager or any of its affiliates is the general partner;
and to the extent that the Manager Group is reorganized pursuant to a bona fide reorganization of the business of Manager, this definition shall be adjusted to the mutual satisfaction of Finco, the Partnership and the Banks;

(nn) "Maintenance Reserve Account" means an account established by the Partnership at agreed upon levels in order to cover the cost profile of the maintenance of the Project XXXXXXXXXX for which the Partnership will be responsible;

(oo) "Material Adverse Effect" means:

(i) any change in the assets, properties, operations or condition, financial or otherwise, of Finco or the Partnership, taken as a whole, which would reasonably be expected to materially and adversely affect the ability of Finco and the Partnership, taken as a whole, to fulfil their obligations under the Senior Finance Documents, or the XXXXXXXXXX Agreement;

(ii) any impairment or reduction in the ability (financial or otherwise) (a) until the earlier of the end of the latest defect warranty period under the DB Contract and XXXXXXXXXX months after the Substantial Completion Date, of the DB Contractor and DB Guarantors collectively, (b) of the OMR Contractor and XXXXXXXXXX collectively or (c) of the XXXXXXXXXX Contractor and XXXXXXXXXX collectively, to fulfil any material covenant or obligation of such entity under the Senior Finance Documents or a Project Contract where such impairment or reduction would reasonably be expected to materially and adversely affect the ability of Finco and the Partnership, taken as a whole, to fulfil their obligations under the Senior Finance Documents, or the XXXXXXXXXX Agreement; or any material impairment of the rights and remedies of the Security Trustee under the Security Documents;

(pp) "Material Entity" means the DB Contractor, the OMR Contractor, the XXXXXXXXXX Contractor, each DB Guarantor, each OMR Guarantor and the XXXXXXXXXX Guarantor , as well as their respective partners or members, for so long as they have obligations outstanding under any Project Contract;

(qq) "OMR Contract" means the XXXXXXXXXX contract to be entered into between the Partnership and the OMR Contractor;

(rr) "OMR Contractor" means XXXXXXXXXX;

(ss) "OMR Guarantee" means a guarantee on a joint and several basis by the OMR Guarantors of the obligations of the OMR Contractor under the OMR Contract;

(tt) "OMR Guarantors" means XXXXXXXXXX;

(uu) "Partnership" means XXXXXXXXXX, a limited partnership formed pursuant to the laws of the XXXXXXXXXX;

(vv) "XXXXXXXXXX Agreement" means the agreement between the Authority and the Partnership in respect of the Project to be dated the date of the Credit Agreement entitled "XXXXXXXXXX";

(ww) "Partnership Loans" means the credit facilities of up to $XXXXXXXXXX to be provided by Finco to the Partnership pursuant to the Sub-Loan Agreement;

(xx) "Proceeds Account" means an account established by the Partnership at the Account Bank into which will be deposited all revenues from the Project, XXXXXXXXXX milestone payments from the Authority, equity invested in the Partnership, the proceeds from any debt financing by the Partnership including the Partnership Loans and, generally, all amounts received by Finco or the Partnership;

(yy) "Project" means the XXXXXXXXXX;

(zz) "Project Contracts" means the XXXXXXXXXX Agreement, the DB, OMR and XXXXXXXXXX Contracts and Guarantees, and such other agreements that are required by the Credit Agreement to be Project Contracts;

(aaa) "Secured Creditors" means the Arranger, the Banks, the Account Bank, the Agent, and the Security Trustee;

(bbb) "Security Documents" means the documents pursuant to which Finco and the Partnership (and others with limited recourse) will provide security for the Credit Facilities;

(ccc) "Security Trustee" means XXXXXXXXXX which will hold the security for and on behalf of the Secured Creditors;

(ddd) "Senior Finance Documents" means generally:

(i) the Credit Agreement;

(ii) the Security Documents; and

(iii) any other agreement executed pursuant to the foregoing to which a Secured Creditor is a party and which is designated a Senior Finance Document by the Security Trustee;

(eee) "Subco" means XXXXXXXXXX a corporation formed under the Canada Business Corporations Act;

(fff) "Sub-Loan Agreement" means the agreement to be entered into between Finco and Subco, in its capacity as general partner of the Partnership, outlining the terms and conditions of the Partnership Loans;

(ggg) "Substantial Completion Date" also means the "XXXXXXXXXX";

(hhh) "XXXXXXXXXX Agreement" means the XXXXXXXXXX contract to be entered into between the Partnership and the XXXXXXXXXX Contractor;

(iii) "XXXXXXXXXX Contractor" means XXXXXXXXXX, a company formed under the laws of XXXXXXXXXX;

(jjj) "XXXXXXXXXX Guarantor of the obligations of the XXXXXXXXXX under the XXXXXXXXXX Agreement; and

(kkk) XXXXXXXXXX.

Facts:

1. The Funds are managed by an indirect subsidiary of Manager.

2. LP A holds all of the issued and outstanding shares of A Co. A Co is a taxable Canadian corporation with its head office at XXXXXXXXXX. A Co's business number is XXXXXXXXXX, and it XXXXXXXXXX.

3. LP Int. holds all of the issued and outstanding shares of B Co. B Co is a taxable Canadian corporation with its head office at XXXXXXXXXX. B Co's business number is XXXXXXXXXX, and it XXXXXXXXXX.

4. LP Canada, A Co and B Co hold all of the issued and outstanding shares of Finco. Finco is a taxable Canadian corporation with its head office at XXXXXXXXXX. Finco's business number is XXXXXXXXXX, and it XXXXXXXXXX.

5. A Co, B Co and LP Canada are the limited partners of Holdings LP. A Co and B Co hold, collectively, approximately a XXXXXXXXXX% interest in Holdings LP while the balance is held by LP Canada. C Co is the sole general partner of Holdings LP and holds a nominal interest in Holdings LP. Each of A Co, B Co and LP Canada hold all of the issued and outstanding shares of C Co in proportion to their overall interest in Holdings LP.

6. Holdings LP holds all of the issued and outstanding shares of Subco. Subco is a taxable Canadian corporation with its head office at XXXXXXXXXX. Subco's business number is XXXXXXXXXX, and it XXXXXXXXXX.

7. Holdings LP and Subco are general partners of the Partnership. Subco is the limited partner of the Partnership. Based on projected capitalization requirements, Holdings LP will hold a XXXXXXXXXX% interest in the Partnership with the other XXXXXXXXXX% interest to be held by Subco.

Proposed Transactions:

8. Holdings LP will borrow money under the Bridge Loan, and will use such funds to subscribe for an interest in the Partnership.

9. In evaluating various options to finance the Project, the Partnership had the following key objectives:

(a) to borrow at the lowest cost of capital;

(b) to borrow from a single lender (or a syndicate of lenders under a single credit agreement) and thereby avoid the significant time and expense of having to deal with, and address the often divergent concerns of, multiple lenders with respect to financing issues that commonly arise between a borrower and a multitude of lenders over the course of a long-term credit facility; and to obtain very long-term financing in order to achieve long-term financial stability for the Partnership and to reduce the time and expense associated with frequent refinancing.

10. The Partnership canvassed various sources of long-term financing in Canada, the U.S. and Europe in order to secure financing that met the above objectives and currently the most favourable source of long-term financing is the Credit Facilities offered by the Banks.

11. The Credit Agreement has not yet been finalized and is currently under negotiation. The Banks and the Partnership have agreed that the Credit Facilities will be structured so that interest paid or credited under the Credit Facilities will be exempt from Part XIII withholding tax under subparagraph 212(1)(b)(vii) of the Act.

12. Finco will enter into the Credit Facilities, and will use the funds to make the Partnership Loans provided that the proposed transactions and the Credit Facilities comply with the provisions of subparagraph 212(1)(b)(vii) of the Act. The Partnership Loans will be made with a term that is similar to the Credit Facilities and with an interest rate that will be equal to XXXXXXXXXX% higher than the interest rate on the corresponding Credit Facilities. Finco's only activity will be the lending of money and its only source of income will be interest and financing fees charged on the Partnership Loans.

13. The Credit Agreement will provide that the Credit Facilities will mature XXXXXXXXXX years from the date the Credit Agreement is signed.

14. The interest charged in respect of the Credit Facilities will be: (a) until the DB Substantial Completion Deadline, the Base Interest Rate plus XXXXXXXXXX%; (b) from the DB Substantial Completion Deadline until XXXXXXXXXX months thereafter, the Base Interest Rate plus XXXXXXXXXX%, and (c) thereafter, the Base Interest Rate plus XXXXXXXXXX%.

15. A commitment fee of XXXXXXXXXX% per annum will be payable on the Credit Facilities based on the undrawn amount of all commitments.

16. Repayment of principal and interest under the Credit Facilities will commence on the earlier of a trigger date and XXXXXXXXXX.

17. Finco will have the right to prepay amounts outstanding under the Credit Facilities without fee, penalty or premium.

18. Finco will be required to make mandatory prepayments under the Credit Facilities in certain circumstances. However, if, as a result of the operation of such mandatory prepayments and all repayments in respect of any particular loan made under the Credit Facilities, an aggregate amount in excess of XXXXXXXXXX% of the outstanding principal amount of such loan would be required to be repaid or prepaid prior to the first business day after the XXXXXXXXXX anniversary of the day such loan is made, the mandatory prepayment or repayment amount shall not be prepaid or repaid as the case may be, and shall instead be held in the Proceeds Account (and shall not be available for distribution). On the business day immediately following the XXXXXXXXXX anniversary of the day an amount equal to the mandatory prepayment or repayment amount shall be applied in prepayment or repayment of such loan.

19. In addition, in certain circumstances, (see Events of Default), Finco or the Partnership will be required to make an offer to repay the Credit Facilities.

20. The Credit Facilities will be subject to the Events of Default.

21. The Proceeds Account, Debt Service Reserve Account and Maintenance Reserve Accounts will be established such that the Partnership and/or Finco can invest such funds in certain qualified investments such as obligations issued or guaranteed by the Canadian federal government, deposit products issued by Schedule 1 Banks and any other investments as agreed between the Credit Parties and the Agent acting reasonably.

22. The Partnership will guarantee the obligations of Finco under the Credit Facilities, and both the Partnership and Finco will be required to provide security for the Credit Facilities.

23. The Banks deal at Arm's Length with the Partnership and Finco.

Purpose of the Proposed Transaction:

24. The purpose of the proposed financing under the Credit Facilities is for Finco to obtain long term financing at the lowest cost of capital, which financing proceeds will, in turn, be used by the Partnership to fund its obligations related to the construction, operation and maintenance of the Project.

25. Finco is being used in the structure to:

(a) facilitate the entry or exit of partners of the Partnership; and

(b) avoid any uncertainty that might arise should a partner dispose of its interest in the Partnership (or any partnership that is a partner of the Partnership) in the future or should a new partner be admitted to the Partnership, specifically with respect to whether a new debt obligation might be created as a result of such a disposition.

26. The legal nature of a corporation is well known to non-resident lenders who engage in financing transactions in global capital markets. In contrast, a typical non-resident financial institution likely has significantly less experience lending to an entity that is not a corporation, such as, in the case of the Partnership. Accordingly, in circumstances where financing is being sought from a non-resident lender, it is preferable from a marketing perspective for the borrower to be a corporate entity.

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 that the final Credit Agreement referred to herein is substantially the same as the draft document provided to us, and provided further that the proposed transactions are completed in the manner described above, we rule as follows:

A. All amounts that are (or are deemed to be, for the purposes of Part XIII of the Act) paid or credited as, or on account of, or in lieu of payment of, or in satisfaction of interest under the Credit Facilities made by Finco to a particular non-resident Bank 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 the payment, the particular non-resident Bank deals at Arm's Length with Finco.

B. Amounts paid by a guarantor under the Credit Agreement in satisfaction of interest owed by Finco under the Credit Agreement will be exempt from withholding taxes under Part XIII of the Act, pursuant to subsection 212(1)(b)(vii) of the Act, provided that at the time of payment Finco would have been exempt under the provisions of 212(1)(b)(vii) of the Act.

C. Subsection 15(2.3) of the Act will apply to the Partnership Loans made by Finco to the Partnership, pursuant to the terms of the Sub-Loan Agreement between Finco and the Partnership, such that subsection 15(2) of the Act will not apply.

D. As a result of the proposed transactions, in and by themselves, subsection 245(2) of the Act will not be applied to re-determine the tax consequences confirmed in the rulings above.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 dated May 17, 2002, issued by the CRA, and are binding provided the Credit Agreement is entered into on or before XXXXXXXXXX.

These rulings are based on the Act as it currently reads and does not take into account any future amendments, whether currently proposed or not, to the Act.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:

(i) the GST implications of any of the proposed transactions;

(ii) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein; nor

(iii) the nature of the legal relationship entered into or contemplated by the entities named above.

Yours truly,

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