2014-0541951R3 Foreign Affiliate Debt Dumping

Principal Issues: (a) Whether particular entities will be considered "qualifying substitute corporations" for purposes of subsection 212.3(4) of the Act; and (b) Whether the proposed distribution will meet the conditions of clause (B) of the description of A in subparagraph 212.3(9)(b)(ii).

Position: (a) Yes; (b) Yes

Reasons: (a) The requirements in the definition of the term “qualifying substitute corporation" in subsection 212.3(4) are satisfied; and (b) the conditions of Clause (B) of the description of A in subparagraph 212.3(9)(b)(ii) are met.

Author: XXXXXXXXXX
Section: 212.3 (2), 212.3(4), 212.3(9)

XXXXXXXXXX                                                                                                     2014-054195

XXXXXXXXXX, 2015

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX and your revised submission of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-named taxpayers.  We also acknowledge the additional information provided to us in your emails and telephone conversations, the last of which was dated XXXXXXXXXX.

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

(i)   in an earlier tax return of the taxpayers or a related person;

(ii)  being considered by a tax services office or a tax centre in connection with a tax return already filed by the taxpayers or a related person;

(iii) under objection by the taxpayers or a related person;

(iv)  before the courts; or

(v)   the subject of a ruling previously issued by the Directorate to the taxpayers or a related person.

This document is based solely on the Facts, Proposed Transactions, Additional Information, and Purpose of Proposed Transactions described below.  Any documentation submitted in respect of your request does not form part of the Facts, Proposed Transactions and Additional Information, and any references thereto are provided solely for the convenience of the reader.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended (the “Act”).

Definitions

The following definitions apply in respect of this advance income tax ruling.  Throughout this advance income tax ruling, the singular should be read as plural and vice versa where the circumstances so require:

“Canco1” means XXXXXXXXXX, an unlimited liability company formed under the laws of the province of XXXXXXXXXX;

“Canco2” means XXXXXXXXXX, an unlimited liability company formed under the laws of the province of XXXXXXXXXX;

“Canco3” means XXXXXXXXXX, an unlimited liability company formed under the laws of the province of XXXXXXXXXX;

“Canco4” means XXXXXXXXXX, an unlimited liability company formed under the laws of the province of XXXXXXXXXX;

“Canco5” means XXXXXXXXXX, a corporation incorporated under the laws of Canada;

“Canco6” means XXXXXXXXXX, an unlimited liability company formed under the laws of the province of XXXXXXXXXX;

“Canco7” means XXXXXXXXXX, a corporation incorporated under the laws of Canada;

“Canco8” means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

“Canco9” means XXXXXXXXXX, an unlimited liability company formed under the laws of the province of XXXXXXXXXX;

“Canco10” means XXXXXXXXXX, a corporation formed under the laws of Canada;

“Canco11” means XXXXXXXXXX, an unlimited liability company formed under the laws of the province of XXXXXXXXXX;

“CRA” means the Canada Revenue Agency;

“Distribution” means the proposed dividend distribution more fully described in paragraph 32;

“FA1” means XXXXXXXXXX, a limited liability partnership formed under the laws of the XXXXXXXXXX;

“FA2” means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX;

“FA3” means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX;

“FA4” means XXXXXXXXXX, a corporation formed under the laws of XXXXXXXXXX;

“foreign affiliate” has the meaning assigned by subsection 95(1);

“GP” means XXXXXXXXXX, a general partnership formed under the laws of the province of XXXXXXXXXX;

“LP1” means XXXXXXXXXX, a limited partnership formed under the XXXXXXXXXX;

“LP2” means XXXXXXXXXX, a limited partnership formed under the laws of the province of XXXXXXXXXX;

“LP3” means XXXXXXXXXX, a limited partnership formed under the laws of the province of XXXXXXXXXX;

“Proposed Transactions” means the transactions described in paragraphs 18 to 32;

“stated capital” in respect of the share capital of a corporation, has the meaning assigned by the statute by which the corporation is governed;

“Taxpayers” refers collectively to Canco7, Canco8 and Canco9;

“Treaty” means the Canada-United States Tax Convention (1980), as amended by the Protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997 and September 21, 2007;

“United States” means the Unites States of America;

“USco1” means XXXXXXXXXX, a corporation formed under the laws of the state of XXXXXXXXXX in the United States;

“USco2” means XXXXXXXXXX, a corporation formed under the laws of the state of XXXXXXXXXX in the United States;

“USco3” means XXXXXXXXXX, a limited liability company formed under the laws of the state of XXXXXXXXXX in the United States;

“USco4” means XXXXXXXXXX, a limited liability company formed under the laws of the state of XXXXXXXXXX in the United States; and

“USco5” means XXXXXXXXXX, a corporation formed under the laws of the state of XXXXXXXXXX in the United States.

Our understanding of the Facts, Proposed Transactions, Additional Information, and Purpose of the Proposed Transactions is as follows:

Facts

1.    USco5 is a wholly-owned subsidiary of USco4, which is a wholly-owned subsidiary of USco3, which is a wholly-owned subsidiary of USco2, which is a wholly-owned subsidiary of USco1. The shares of USco1 are listed on the XXXXXXXXXX.

2.    USco5 is resident in the United States for purposes of the Treaty and a qualifying person within the meaning of Article XXIX-A of the Treaty.

3.    Canco1 and Canco2 are corporations resident in Canada for purposes of the Act and are wholly-owned subsidiaries of USco5. Canco1 and Canco2 are each disregarded entities for federal income tax purposes in the United States.

4.    Canco1 owns XXXXXXXXXX% and Canco2 owns XXXXXXXXXX% of all issued and outstanding shares of Canco10.

5.    Canco1 is also the sole general partner in LP1 and Canco2 is the sole limited partner in LP1. LP1 is treated as a corporation for federal income tax purposes in the United States.

6.    LP1 owns all the issued and outstanding shares of Canco3, and Canco3 owns all the issued and outstanding shares of Canco4.

7.    Canco4 controls Canco5 through owning certain classes of shares of Canco5. Canco5 has the following classes of shares issued and outstanding: Class XXXXXXXXXX, Class XXXXXXXXXX, Class XXXXXXXXXX, Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX. Class XXXXXXXXXX and Class XXXXXXXXXX shares are exchangeable shares for shares of USco1 and are widely owned by public shareholders and Canco4. Canco4 also owns all the issued and outstanding Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX shares of Canco5. Canco10 owns all the issued and outstanding Class XXXXXXXXXX preferred shares of Canco5.

8.    Canco5 owns all the issued and outstanding shares of Canco6, and Canco6 owns all the issued and outstanding shares of Canco7. Canco7 has its head office located at XXXXXXXXXX. Canco7 deals with the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.

9.    Canco7 owns all the issued and outstanding shares of Canco11. Canco7 is also the sole limited partner in LP3 (XXXXXXXXXX%) and Canco11 is the sole general partner in LP3 (XXXXXXXXXX%).

10.   Canco7 owns all the issued and outstanding shares of Canco8. Canco8 has its head office located at XXXXXXXXXX. Canco8 deals with the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.

11.   Canco8 is the sole general partner in LP2 (XXXXXXXXXX%) and Canco7 is the sole limited partner in LP2 (XXXXXXXXXX%).

12.   Canco7, Canco8 and LP2 are the general partners in GP, holding XXXXXXXXXX%, XXXXXXXXXX%, and XXXXXXXXXX% respectively.

13.   GP owns all the issued and outstanding shares of Canco9. Canco9 has its head office located at XXXXXXXXXX. Canco9 deals with the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.

14.   GP is also the sole general partner in FA1 and Canco9 is the sole limited partner in FA1. FA1 is considered to be a non-resident corporation for purposes of the Act. FA1 is a foreign affiliate of Canco7 and Canco9.

15.   FA1 wholly owns FA2, which wholly owns FA3, which wholly owns FA4. Each of FA2, FA3 and FA4 are non-resident corporations for purposes of the Act.

16.   The Taxpayers are each a corporation resident in Canada for purposes of the Act.

17.   USco5 indirectly owns and controls the Taxpayers through intermediate partnerships and companies. USco5 is the beneficial owner of any dividend distributions from Canco1 and Canco2.

Proposed Transactions

18.   USco5 will subscribe for preferred shares in the capital stock of each of Canco1 and Canco2 for a subscription price of US$XXXXXXXXXX and US$XXXXXXXXXX respectively. The subscription amount will be added to the stated capital of that class of shares for each of Canco1 and Canco2 respectively.

19.   Canco1 and Canco2 will each subscribe for XXXXXXXXXX preferred partnership units of LP1 in the amounts of US$XXXXXXXXXX and US$XXXXXXXXXX respectively. The subscription amount will be added to their respective partnership capital accounts.

20.   LP1 will subscribe for preferred shares of Canco3 for a subscription price of US$XXXXXXXXXX.  The subscription amount will be added to the stated capital of that class of shares.

21.   Canco3 will subscribe for preferred shares of Canco4 for a subscription price of US$XXXXXXXXXX.  The subscription amount will be added to the stated capital of that class of shares.

22.   Canco4 will subscribe for preferred shares of Canco5 for a subscription price of US$XXXXXXXXXX.  The subscription amount will be added to the stated capital of that class of shares.

23.   Canco5 will subscribe for XXXXXXXXXX in the capital stock of Canco6 for a subscription price of US$XXXXXXXXXX.  The subscription amount will be added to the stated capital of that class of shares.

24.   Canco6 will subscribe for XXXXXXXXXX in the capital stock of Canco7 for a subscription price of US$XXXXXXXXXX.  The subscription amount will be added to the stated capital of that class of shares.

25.   Canco7 will subscribe for partnership units of LP2 and GP in the amount of US$XXXXXXXXXX and US$XXXXXXXXXX respectively. The subscription amount will be added to Canco7’s capital accounts of each of LP2 and GP respectively. Canco7 will also subscribe for XXXXXXXXXX in the capital stock of Canco8 for a subscription price of US$XXXXXXXXXX. The subscription amount will be added to the stated capital of that class of shares.

26.   Canco8 will subscribe for partnership units of LP2 in the amount of US$XXXXXXXXXX. The subscription amount will be added to Canco8’s capital account of LP2.

27.   LP2 and Canco8 will subscribe for partnership units of GP in the amount of US$XXXXXXXXXX and US$XXXXXXXXXX respectively. The subscription amount will be added to their respective capital accounts of GP.

28.   GP will subscribe for XXXXXXXXXX in the capital stock of Canco9 for a subscription price in the amount of US$XXXXXXXXXX. The subscription amount will be added to the stated capital of that class of shares.

29.   GP will also subscribe for additional units of FA1 in the amount of US$XXXXXXXXXX. The subscription amount will be added to the capital account of FA1.

30.   Canco9 will subscribe for additional units of FA1 in the amount of US$XXXXXXXXXX. The subscription amount will be added to the capital account of FA1.

31.   FA1 will either subscribe for ordinary shares in the capital stock of FA2 or lend the funds obtained from GP and Canco9 described in paragraphs 29 and 30, to FA2. FA2 will lend the funds in the same amount to FA4.

32.   FA1 will make a Distribution in the amount of US$XXXXXXXXXX proportionately to Canco9 and GP, within XXXXXXXXXX months of FA4 receiving the loan described in paragraph 31. The Distribution will be deemed to be a dividend under subsection 90(2) of the Act.

Additional Information

33.   Contributions described in paragraphs 18 to 21 and 23 to 30 will be made in the same proportions as the current shareholdings and partnership interests to ensure corporate and partnership holdings after the contributions are proportionately the same.

34.   The subscription of units in FA1 described in paragraphs 29 and 30 by GP and Canco9 respectively, will represent an investment in a non-resident corporation pursuant to paragraph 212.3(10)(a), for purposes of subsection 212.3(2).

35.   The value of all shares of any foreign affiliates that are held directly or indirectly by Canco3, Canco4, Canco5, Canco6, Canco7 and Canco8 does not exceed XXXXXXXXXX% of the total fair market value of all of the properties owned by Canco3, Canco4, Canco5, Canco6, Canco7 and Canco8 respectively (determined without reference to debt obligations of any corporation resident in Canada in which the other corporation has a direct or indirect interest).

36.   The exception in subsection 212.3(16) is not applicable to the Proposed Transactions.

37.   XXXXXXXXXX

Purpose of the Proposed Transactions

38.   The purpose of the Proposed Transactions is to ensure adequate funds are made available to FA4 to fund its pension plan and to repatriate excess cash from FA1.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, Proposed Transactions, Additional Information and Purpose of the Proposed Transactions, the Proposed Transactions are completed in the manner described above, and there are no other transactions that may be relevant to the rulings given, our rulings are as follows:

A.    Canco1 and Canco2 will each be considered to be qualifying substitute corporations as that term is defined in subsection 212.3(4).

B.    The Distribution will be considered to be received as a dividend in respect of a class of shares of capital stock of FA1 by the Taxpayers, corporations resident in Canada not dealing at arm’s length with each of Canco1 and Canco2, for the purposes of clause (B) of the description of A in subparagraph 212.3(9)(b)(ii).

Comments

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014, and is binding on the CRA provided that the Proposed Transactions are completed within XXXXXXXXXX months of the date of this letter.

Nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of any tax consequences relating to the Facts, Proposed Transactions, and Additional Information described herein other than those specifically described in the rulings given above and in particular, without limiting the generality of the foregoing, in respect of:

(a)   The application of any of the provisions of section 212.3 other than those specifically described in the Rulings above, including the exception under subsection 212.3(16) as noted in paragraph 36 and its application to the Proposed Transactions; and

The tax consequences associated with XXXXXXXXXX described in paragraph 37.

Yours truly,

XXXXXXXXXX
Manager
for Division Director
International Division
Income Tax Rulings Directorate

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