Principal Issues: (1) Is the interest paid or payable by Finco Subco on the Third-party Loans deductible pursuant to 20(1)(c)? (2) Is the interest paid or payable by New Canco on the New Canco Loans deductible pursuant to 20(1)(c)? (3) Is the interest paid or payable on the New Opco Demand Loans deductible pursuant to 20(1)(c)? (4) XXXXXXXXXX
Position: (1)-(3) Yes, to the extent amounts are paid pursuant to a legal obligation to pay interest. (4) Yes.
Reasons: (1)-(3) Application of 20(1)(c). (4) XXXXXXXXXX
XXXXXXXXXX 2009-030892
XXXXXXXXXX , 2009
XXXXXXXXXX :
Re: XXXXXXXXXX
(the "Taxpayers")
This is in response to your XXXXXXXXXX request for an amendment to advance income tax ruling 2008-027347, which was issued on XXXXXXXXXX , 2008 (the "Ruling").
The definition of "Daylight Loan Facility" is hereby deleted and paragraphs 80-88, 98, 100 and Rulings D, E and G are hereby deleted and replaced with:
80. Finco Subco will borrow, over time, funds from arm's-length third-party lenders with the following terms (the "Third-party Loans"):
a. denominated in XXXXXXXXXX ;
b. XXXXXXXXXX ; and.
c. the obligation of Finco Subco to pay the Third-party Loans may be assumed by a related party at the option of the Parentco Group.
81. The proceeds from the Third-party Loans will be loaned by Finco Subco to New Canco with similar terms plus a small spread on the interest rate (the "New Canco Loans"). New Canco will incorporate New Cansub under the XXXXXXXXXX and subscribe for common shares of New Cansub for nominal value. New Cansub's authorized share capital will consist of an unlimited number of common shares and preferred shares (the "New Cansub Preferreds"). Each common share of New Cansub will entitle the holder to one vote. The holder of New Cansub's common shares will be entitled to receive dividends if, as and when declared at the discretion of New Cansub's directors, and will be entitled to receive the remaining property of New Cansub upon its winding-up or dissolution. New Cansub will not be a "financial intermediary corporation" as defined in subsection 191(1).
83. New Canco will borrow, over time and under the New Canco Loans and lend an amount equivalent to the funds borrowed under the New Canco Loans to New Opco (the "New Opco Demand Loans") at interest. The New Opco Demand Loans shall be denominated in XXXXXXXXXX .
84. New Opco will use the proceeds from the New Opco Demand Loans to invest in New Cansub Preferreds. The dividend rate on the New Cansub Preferreds will be of sufficient magnitude such that New Opco will earn a positive amount in excess of the interest it incurs on the New Opco Demand Loans.
85. The New Cansub Preferreds will have the following attributes:
a) non-voting;
b) entitled to a cumulative dividend. The dividends payable will be calculated by reference to the redemption price of the New Cansub Preferreds and a floating rate XXXXXXXXXX % in excess of the interest rate payable on the New Opco Demand Loans (defined in paragraph 82 above):
c) redeemable at the option of issuer for an amount equal to the issue price in XXXXXXXXXX plus any accrued but unpaid dividends, by New Cansub;
d) retractable at any time at the option of the holder for an amount equal to the issue price in XXXXXXXXXX plus any accrued but unpaid dividends; and,
e) entitled to priority over the common shares of New Cansub and all other shares ranking junior to the New Cansub Preferreds with respect to the payment of dividends and the distribution of assets of New Cansub in the event of any liquidation, dissolution or winding-up of New Cansub or other distribution of assets of New Cansub among its shareholders for purposes of winding-up its affairs.
86. New Cansub will loan in XXXXXXXXXX the proceeds of the New Cansub Preferreds subscriptions interest-free to New Canco (the "Interest-free Loans 2").
87. New Canco will enter into a support agreement whereby it will undertake to capitalize New Cansub to the extent New Cansub requires funds to meet its financing obligations (e.g., paying dividends on its preferred shares).
88. New Canco will lend the proceeds it receives in respect of the Interest-free Loans 2 to XXXXXXXXXX interest free ("Interest-free Loans 1"). Interest-free Loans 1 will be non-interest-bearing and denominated in XXXXXXXXXX .
98. The XXXXXXXXXX main purpose of the Proposed Transactions for New Opco to utilize the losses that are anticipated to be incurred by New Canco in respect of the proposed investment in the Project. The expected results of the transaction are:
(a) New Canco will earn interest income from New Opco on the New Opco Demand Loans;
(b) New Opco will receive dividend income on its investment in the New Cansub Preferreds; and
(c) New Cansub will have the financial capacity to pay dividends on the New Cansub Preferreds from capital contributions made by New Canco.
100. The New Cansub Preferreds that will be issued, as described in paragraphs 84-85, above, will not be, at any time during the implementation of the Proposed Transactions described herein,
(a) the subject of a "dividend rental arrangement" as defined in subsection 248(1);
(b) the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or
(c) issued for consideration that is or includes:
i. an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or
ii. any right of the type described in subparagraph 112(2.4)(b)(ii).
D. To the extent the interest paid or payable by Finco Subco on the Third-party Loans is paid pursuant to a legal obligation to pay interest, the interest paid on the money borrowed in paragraph 80 above, for the purposes of making the New Canco Loans to New Canco, will be deductible pursuant to paragraph 20(1)(c).
E. To the extent the interest paid or payable by New Canco on the New Canco Loans is paid pursuant to a legal obligation to pay interest, the interest paid on the money borrowed in paragraphs 81 and 83, above, for the purposes of making the New Opco Demand Loans to New Opco, will be deductible pursuant to paragraph 20(1)(c).
G. To the extent the interest paid or payable by New Opco on the New Opco Demand Loans is paid pursuant to a legal obligation to pay interest, the interest paid on the money borrowed in paragraphs 83 and 84, above, for the purpose of acquiring the New Cansub Preferreds, will be deductible pursuant to paragraph 20(1)(c).
Finally, the last paragraph of the ruling is hereby deleted and replaced with the following:
The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the Proposed Transactions commence on or before XXXXXXXXXX . In addition, nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to, reviewed or has made any determination in respect of the application of subsection 247(2) to the Proposed Transactions.
Comment
We note that the 2009 Federal Budget contains a proposal to repeal section 18.2. If this proposal is enacted, Ruling F will no longer be relevant.
Yours truly,
XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch