Current structure
Canco (an indirect subsidiary of Parentco) holds the shares of FA4 (a U.S. corporation) through three stacked U.S. subsidiaries (FA1 down to FA3), which are wholly-owned excepting some group management employees. The business of FA4 consists mainly of the acquisition of portfolios of debt receivables across the delinquency spectrum for the purposes, essentially, of the liquidation of these portfolios on a profitable basis through collections, or perhaps resale. Such portfolios are held by FA4, and an LP of which FA4 is a limited partner, through trusts (the “FA4 Trusts,” and “LP Trusts”) of which FA4 or LP, as the case may be, is the settlor, and sole beneficiary and administrator. The acquisition and collection of these portfolios (and apparently other group entities) are handled by employees of FA4.
FA5 (a U.S. subsidiary of FA3) holds the FA5 Subsidiaries, which over time have acquired various debt portfolios for collection. They have no employees, and all activities required to acquire, own and collect their portfolios (as well as for administrative support) are performed by the FA4 employees. The group portfolios are split among different entities due to differing state licensing requirements, and also to limit risk.
Transaction
Using funding received from FA6 (a Finco LLC subsidiary of FA3), an FA5 Subsidiary acquired from an arm’s length person, the FA5 New Portfolio, being a secured loan portfolio.
Rulings
Provided inter alia LP is a partnership for purposes of the Act and FA4, FA5 and the FA5 Subsidiary continue to be resident in the U.S. for Treaty purposes:
- The income earned by the FA5 Subsidiary from the accounts of the FA5 New Portfolio (the “Income”) will be included in computing the income or loss from an active business of the FA5 Subsidiary pursuant to s. 95(2)(a)(i).
- The Income will be added to the exempt earnings of the FA5 Subsidiary pursuant to Reg. 5907(1) – exempt earnings – s. (d)(ii)(A)(I).