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:
deductibility of interest on borrowing to make distribution
Position:
cost of borrowing deductible
Reasons:
meets current admin position
XXXXXXXXXX 971963
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: XXXXXXXXXX
We are writing in response to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling with respect to the above-noted taxpayer. We also acknowledge your letters dated XXXXXXXXXX and our several telephone conversations.
To the best of your knowledge and that of XXXXXXXXXX none of the issues involved in the requested ruling is being considered by a district office or a taxation centre in connection with a tax return of that particular applicant already filed and none of the issues involved in the requested rulings in respect of that particular applicant is under appeal or objection.
Except as otherwise noted, all statutory references in this ruling application are references to the provisions of the Income Tax Act Canada (the "Act").
Our understanding of the statements of facts and purpose of the proposed transactions is as follows:
Facts
1.XXXXXXXXXX is a “taxable Canadian Corporation” and a “private corporation”. The terms "private corporation" and "taxable Canadian corporation" as used here and subsequently, have the meaning assigned by subsection 89(1).
2.XXXXXXXXXX is principally involved in the XXXXXXXXXX.
3.XXXXXXXXXX is wholly owned by XXXXXXXXXX (“Canholdco”) a “taxable Canadian Corporation” and a “private corporation”.
4.Canholdco is wholly owned by XXXXXXXXXX, a New York corporation which is resident in the United States. XXXXXXXXXX is not a “taxable Canadian Corporation”. XXXXXXXXXX has a Canadian branch operation which also carries on the XXXXXXXXXX business.
5.XXXXXXXXXX is located in XXXXXXXXXX and is served by the XXXXXXXXXX District Taxation Office and files tax returns at the XXXXXXXXXX Taxation Centre. XXXXXXXXXX is a new corporation formed as the result of an amalgamation of predecessor corporations on XXXXXXXXXX, (as described in paragraph 18 below). It’s business number is XXXXXXXXXX.
6.The authorized share capital of XXXXXXXXXX consists of an unlimited number of common shares.
7.The issued share capital of XXXXXXXXXX consists of XXXXXXXXXX common shares.
8.The “paid up capital” of the issued share capital of XXXXXXXXXX is $XXXXXXXXXX. The term paid-up capital ("PUC"), as used here and subsequently, has the meaning assigned by subsection 89(1) of the Act.
9.The retained earnings of XXXXXXXXXX.
10.XXXXXXXXXX was an amalgamated corporation which was formed as the result of an amalgamation of XXXXXXXXXX (a Canadian public company which was controlled by XXXXXXXXXX itself a Canadian public company) and XXXXXXXXXX, a wholly owned subsidiary of XXXXXXXXXX. The shareholders of XXXXXXXXXX exchanged their shares for a combination of new Class XXXXXXXXXX Shares, Class XXXXXXXXXX Shares, and Class XXXXXXXXXX Shares of XXXXXXXXXX.
11.On XXXXXXXXXX, immediately following the amalgamation and share exchange to form XXXXXXXXXX, a wholly owned subsidiary of Canholdco, XXXXXXXXXX (“Acquisition Co.”) acquired all of the outstanding Class XXXXXXXXXX Shares of XXXXXXXXXX from the public shareholders for cash consideration of $XXXXXXXXXX.
12.Also on XXXXXXXXXX, Acquisition Co. subscribed for XXXXXXXXXX common shares of XXXXXXXXXX for cash consideration of $XXXXXXXXXX. The cash was used to redeem all of the outstanding Class XXXXXXXXXX Shares and Class XXXXXXXXXX Shares. The aggregate paid-up capital of the Class XXXXXXXXXX Shares and Class XXXXXXXXXX Shares was $XXXXXXXXXX. The non consolidated retained earnings of XXXXXXXXXX. Immediately before the subscription for common shares, Acquisition Co. and XXXXXXXXXX were dealing at arm's length for purposes of the Act.
13.Canholdco received the $XXXXXXXXXX as the result of subscription by XXXXXXXXXX for XXXXXXXXXX fully paid common shares of Canholdco. The full amount of $XXXXXXXXXX was added to the stated capital account of Canholdco.
14.On XXXXXXXXXX, as a result of the transactions in paragraphs 11 and 13, Acquisition Co. acquired control of XXXXXXXXXX.
15.The total cash consideration of $XXXXXXXXXX paid by Acquisition Co. to acquire control of XXXXXXXXXX was the result of a subscription by Canholdco for XXXXXXXXXX fully paid common shares of Acquisition Co. The full amount of $XXXXXXXXXX was added to the stated capital account of Acquisition Co.
16.Since XXXXXXXXXX has been repatriated to XXXXXXXXXX by a series of reductions of stated capital of old XXXXXXXXXX, Acquisition Co. and Canholdco.
17.XXXXXXXXXX was an amalgamated corporation which was formed as the result of vertical amalgamation of XXXXXXXXXX (name changed from Acquisition Co. on XXXXXXXXXX) and its wholly owned subsidiary XXXXXXXXXX.
18.XXXXXXXXXX is an amalgamated corporation which was formed as the result of a vertical amalgamation of XXXXXXXXXX, itself an amalgamated corporation, and its wholly owned subsidiary XXXXXXXXXX. It has not yet selected a fiscal period.
19.Effective XXXXXXXXXX, approximately $XXXXXXXXXX were sold to XXXXXXXXXX (the Canadian branch) the proceeds of which are recorded as receivable from XXXXXXXXXX. In XXXXXXXXXX intends to pay the account receivable and then return to cash the XXXXXXXXXX through a series of stated capital reductions of XXXXXXXXXX and Canholdco.
Proposed Transactions
20.Subject to approval: by the board of Directors of XXXXXXXXXX; Canholdco as shareholder; and that which may be required from third party creditors, $XXXXXXXXXX reduction in the stated capital of the common shares of XXXXXXXXXX is proposed to be effected by reducing the stated capital of each common share of XXXXXXXXXX that is owned by Canholdco. Canholdco will repatriate the funds it receives by a series of stated capital reductions of its own common shares held by XXXXXXXXXX.
21.XXXXXXXXXX, a wholly owned Canadian subsidiary corporation of XXXXXXXXXX will borrow from the XXXXXXXXXX Bank under a revolving credit facility up to $XXXXXXXXXX with a borrowing base initially set at $XXXXXXXXXX.
22.XXXXXXXXXX will borrow from XXXXXXXXXX approximately $XXXXXXXXXX (the "Borrowing").
23.XXXXXXXXXX will pay to Canholdco the proceeds of the Borrowing obtained from XXXXXXXXXX, as described in paragraph 22 above, in consideration for the reduction in the stated capital of the common shares owned by Canholdco as described in paragraph 20 above.
24.On or about XXXXXXXXXX proposes to issue a United States public debt offering of $XXXXXXXXXX of senior subordinated notes (the "Notes") under an indenture (the "Indenture"). The Notes will have a term of XXXXXXXXXX years and will be guaranteed on a senior subordinated basis by XXXXXXXXXX.
25.The expected coupon rate will be XXXXXXXXXX% with a proposed issue price of XXXXXXXXXX% of the principal amount plus accrued interest, if any. Interest on the Notes will be payable semi-annually in arrears. The Notes will not be redeemable at the company's option for the first five years following the date of issuance. Thereafter the Notes will be redeemable in whole or in part at a premium declining to par at the end of the eighth year.
26.There will be no manadatory sinking fund payments for the Notes.
27.In the event of a change of control (as defined below), the company will be required to offer to repurchase the notes at an amount equal to XXXXXXXXXX% of the face thereof.
28.A "Change of Control" will be deemed to have occurred in the event that, after the date of the Indenture, either (a) any person or any persons acting together that would constitute a group (for purposes of Section 13(d) of the Securities Exchange Act of 1934, or any successor provision thereto) (a "Group"), together with any affiliates or related persons thereof, and which person or Group shall not be a Permitted Holder, shall beneficially own (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, or any successor provision thereto) more than 50% of the aggregate voting power of all classes of Capital Stock of the Company entitled to vote generally in the election of directors; or (b) any person or Group, together with any affiliates or related persons thereof, and which person or Group shall not be a Permitted Holder, shall succeed in having a sufficient number of its nominees elected to the Board of Directors of the Company such that such nominees, when added to any existing director remaining on the board of Directors of the Company after such election who is an affiliate or related person of such Group, will constitute a majority of the Board of Directors of the Company.
29.Except as described above with respect to a Change of Control, the Indenture does not contain any other provisions that permit a holder of the Notes to require that the XXXXXXXXXX repurchase or redeem the Notes in the event of a takeover, recapitalization or similar restructuring.
30.XXXXXXXXXX will use the proceeds from the issue of the Notes to repay the Borrowing.
Purpose of the Proposed Transactions
The purpose of the proposed borrowing by XXXXXXXXXX is to increase deductible interest expense in XXXXXXXXXX, which is expected to be currently taxable and to reduce interest expense on high rate financing in XXXXXXXXXX, which is currently not taxable.
Rulings Given
A.Provided that the stated capital of the common shares of XXXXXXXXXX owned by Canholdco immediately prior to the reduction in the stated capital of those shares is equal to or greater than the amount paid upon the reduction of the stated capital of those shares, the interest expense on the borrowed funds which are used to return capital of those shares will be deductible pursuant to paragraph 20(1)(c) in computing the income of XXXXXXXXXX for the taxation year in respect of which such expense is paid or payable, depending on the method regularly followed by XXXXXXXXXX in computing its income.
B.The interest payable by XXXXXXXXXX, a corporation resident of Canada, to a holder of the Notes with whom XXXXXXXXXX is dealing at arm's length, will be exempt from the application of paragraph 212(1)(b) by virtue of the provisions of subparagraph 212(1)(b)(vii).
C.As a result of the proposed transactions, in and by themselves, the provisions of subsection 245(2) will not be applied to re-determine tax consequences confirmed in the Rulings given.
These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada, Taxation provided that the proposed transactions described herein are completed by XXXXXXXXXX.
Our rulings are based on the Act in its present form and do not take into consideration any proposed amendments to the Act.
Nothing in this ruling should be construed as implying that Revenue Canada, Taxation has agreed to or reviewed the determination of the PUC of the XXXXXXXXXX common shares referred to herein.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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