Principal Issues: Effect of minor changes to proposed transactions?
Position: Changes to certain proposed transactions described in ruling 2010-037728 result in certain changes to ruling given.
Reasons: Minor changes to proposed transactions result in the application of subsection 20(3).
XXXXXXXXXX 2010-038999 XXXXXXXXXX
XXXXXXXXXX , 2010
Dear XXXXXXXXXX :
Re: Supplemental Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your email of XXXXXXXXXX , requesting certain changes to our advance income tax ruling number 2010-037728 dated XXXXXXXXXX , 2010 (the "Ruling"). Unless otherwise indicated, the capitalized terms used in this letter have the meanings given to them in the Ruling.
You advised that all steps contemplated in the Ruling have been completed as described in the Ruling. You have further advised that the additional steps of Parentco completing a private placement bond offering and using a portion of the cash proceeds from that bond offering to repay Bank Debt A and Bank Debt B were also completed. Accordingly, the proposed transactions will have to be amended as described below.
Changes to Proposed Transactions
1. Paragraph 22 of the Ruling is amended by the addition of the following sentences:
Also on XXXXXXXXXX , Parentco completed a private placement bond offering under which they received approximately XXXXXXXXXX $XXXXXXXXXX (the "Bond Debt"). The Bond Debt is legally effective and carries an obligation to pay interest at a market rate to the bondholders. On XXXXXXXXXX , Parentco used XXXXXXXXXX $XXXXXXXXXX of the cash proceeds from the Bond Debt to repay Bank Debt A.
2. The first sentence of Paragraph 23 of the Ruling is amended to replace the phrase "proceeds of" with the phrase "XXXXXXXXXX $XXXXXXXXXX cash proceeds from" and to include the phrase "forwarded to Foreignco 2" between the phrases "Bank Debt A" and "to loan".
3. The first sentence of Paragraph 24 of the Ruling is amended to remove the phrases "dependent on final adjustments to the Purchase Price and its internal cash resources expected at the time of the Acquisition," and "up to".
4. Paragraph 25 of the Ruling is amended to include the phrase "XXXXXXXXXX $XXXXXXXXXX cash" between the words "the" and "proceeds", to remove the word "approximately", and by the addition of the following sentence:
On the same day, XXXXXXXXXX $XXXXXXXXXX of the cash proceeds from the Bond Debt was used to repay Bank Debt B.
Changes to Rulings
The ruling given in the Ruling is replaced with the following ruling:
Provided that Parentco has a legal obligation to pay interest on the Bond Debt and that the Loan 1 to Foreignco 2 and the XXXXXXXXXX common shares in HoldcoUS continue to be held by Parentco for the purpose of gaining or producing income, in computing its income for a taxation year, Parentco will be entitled to deduct, pursuant to subsection 20(3) and paragraph 20(1)(c) of the Act, the lesser of (i) the interest on the portions of the Bond Debt used to repay Bank Debt A and Bank Debt B, as described in 22 and 25 above, paid in the year or payable in respect of the year (depending on the method regularly followed by Parentco in computing its income for the purposes of the Act) or (ii) a reasonable amount in respect thereof.
The rulings above are binding on the Canada Revenue Agency subject to the same limitations and qualifications set out in the Ruling.
Yours truly,
XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate