2015-0622091R3 Supplemental Ruling

Principal Issues: Changes to the facts and proposed transactions in Advance Income Tax Ruling 2015-056473.

Position: The rulings in file 2015-056473 will continue to be valid.

Reasons: The changes do not affect our conclusions.

Author: XXXXXXXXXX
Section: 20(1)(c), 112, 245

XXXXXXXXXX                                                                                                                                 2015-062209

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Advance Income Tax Ruling – supplement to file 2015-056473
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX wherein you advised us of certain changes to the facts and proposed transactions in Advance Income Tax Ruling 2015-056473 (the “AITR”). Terms referred to herein are as set out in the AITR.

Amended facts and proposed transactions

As a result of your letter, the following amendments are made to the Legal Entities, Facts and Proposed Transactions sections of the AITR: 

1.    Paragraph (e) in the section Legal Entities is deleted. Paragraphs (g) and (h) are amended to read as follows:

(g) “LP Limited Partner” means Canco2, as referred to in paragraph 20 hereof;

(h) “LP Partners” means Canco2 and Newco2;

2.    Paragraph 11 is amended to read as follows:

In XXXXXXXXXX, Parent incorporated Canco2. The intent is for each of Canco1 and Canco2 to be generally accountable for its performance and to support the liabilities associated with its operations. Canco2 will be carrying on and growing certain segments of the XXXXXXXXXX business in Canada. To this end, Canco1 will transfer directly or indirectly to Canco2 its shares of, or net assets related to, its XXXXXXXXXX activities in XXXXXXXXXX. Canco1 and Canco2 have provided, and will continue to provide, certain financial guarantees in respect of certain of the Parent Affiliated Group’s liabilities. In addition, each company has, and will have, liabilities that may not be subject to similar financial guarantees by the members of the Parent Affiliated Group.

3.    The first and second paragraphs of Paragraph 12 are amended to read as follows:

The taxation year of Canco2 ends, or will end, on XXXXXXXXXX. It is expected that Canco2 will generate sufficient annual taxable income in XXXXXXXXXX and subsequent taxation years to fully offset its annual share of the interest expense allocated to it as a limited partner of New LP in respect of interest paid or payable by New LP on the New Promise to Pay described in paragraphs 28, 31, 33(iii) and 34(iii) below. More specifically, the taxable income (before the Proposed Transactions) of Canco2 is estimated at CAD XXXXXXXXXX for XXXXXXXXXX and at approximately CAD XXXXXXXXXX for each of the following taxation years.

It is expected that Canco2 will have a permanent establishment only in XXXXXXXXXX.

4.    Paragraph 13 is amended to read as follows:

The arm’s-length borrowings of the Parent Affiliated Group currently amount to approximately USD XXXXXXXXXX and its cash or cash equivalents on hand is approximately USD XXXXXXXXXX. The Parent Affiliated Group is in a position to increase its current arm’s-length borrowings by an amount of USD XXXXXXXXXX.

5.    Paragraph 14 is amended to read as follows:

Canco1 and Canco2 are controlled foreign corporations for U.S. federal income tax purposes. Parent is therefore subject to the U.S. anti-deferral rules contained in Subpart F of the Code with respect to certain categories of income (commonly referred to as Subpart F income) earned by Canco1 and Canco2. Subpart F income includes most types of passive income, such as dividends, interest, royalties and gains from the sale of property that produces passive income or that is held for investment. If Canco1 and Canco2 have Subpart F income, Parent must include that income in its gross income as a deemed dividend, unless certain narrow exceptions apply.

6.    The fifth and sixth sentences of the introductory paragraph of the Proposed Transactions are amended to read as follows:

The unwinding of the loss consolidation arrangement will be executed when jointly determined by Canco1, Canco2, New LP and Newco1, but no later than XXXXXXXXXX, except to the extent that the maturity date of the Purchase and Forward Repurchase Agreement is extended, as described in subparagraph 28(iv) below. Such an extension may require a favourable ruling from the CRA, whether by renewal of this ruling or otherwise.

7.    Paragraph 20 is amended to read as follows:

Canco2 will be the limited partner of New LP (referred to in this letter as the “LP Limited Partner”). Based on its initial contribution to New LP, Canco2 will have a XXXXXXXXXX% ownership interest in New LP and will be entitled to a XXXXXXXXXX% share of the income or loss of New LP.

8.    Paragraph 21 is amended to read as follows:

Canco1 will use CAD XXXXXXXXXX of its cash on hand and bank overdraft facility to subscribe for Preferred Shares of Newco1 which will be issued immediately before the transaction described in paragraph 27 below. The PUC of the Preferred Shares will be equal to the subscription price represented in Canadian dollars.

9.    Paragraph 23 is amended to read as follows:

Shortly after the transactions described in paragraphs 21 and 22 above (no more than within XXXXXXXXXX), the cash on hand and bank overdraft facility of Canco1 will be used in the same manner, by the same parties, and for the same purposes, first, to subscribe for Preferred Shares as described in paragraph 21 and, secondly, to increase the amount of the Canco1 Loan as described in paragraph 22.

10.   Paragraph 24 is amended to read as follows:

The total (and final) amount of the Preferred Shares and of the Canco1 Loan will, after the implementation of the transactions described in paragraphs 21, 22 and 23 above, be CAD XXXXXXXXXX. Thus, the amount of the loss utilization arrangement described in the Proposed Transactions will be CAD XXXXXXXXXX, which is less than the arm’s length borrowing capacity of the Parent Affiliated Group that is currently unused, which amounts to approximately USD XXXXXXXXXX.

11.   Paragraph 25 is amended to read as follows:

The purpose of carrying out the transactions described in paragraphs 21, 22 and 23 above solely with CAD XXXXXXXXXX of cash on hand and bank overdraft facility is to minimize borrowing fees and to avoid the administrative burden with the lenders. The transactions will be implemented, wire transfers will be made, and there will be appropriate paper record-keeping thereof. 

12.   Paragraph 27 is amended to read as follows:

Canco1, New LP and Newco1 will enter into a purchase, forward repurchase and call agreement (referred to in this letter as the “Purchase and Forward Repurchase Agreement”) whereby Canco1 will sell the Preferred Shares to New LP in exchange for an interest-bearing promise to pay by New LP in favor of Canco1 in the amount of CAD XXXXXXXXXX (referred to in this letter as the “New LP Promise to Pay”) and whereby Canco1 agrees to repurchase the Preferred Shares owned by New LP on the Forward Purchase Date.

The New LP Promise to Pay will be based on, and will not exceed, the amount that the Parent Affiliated Group could borrow from arm’s length lenders of approximately USD XXXXXXXXXX.

13.   Paragraph 36 is amended to read as follows:

Canco2 will compensate Canco1 for the use of its available tax attributes. The compensation will be negotiated at an arm’s length price between Canco1 and Canco2. The compensation may be achieved by distributions by Canco2 (more precisely by a reduction of capital) followed by contributions of capital to Canco1 of such amounts received.

14.   Paragraph 38 is amended to read as follows:

None of Canco1, Canco2, Newco1 and Newco2 is or will be a specified financial institution or a financial intermediary corporation.

15.   Paragraph 39 is amended to read as follows:

Canco1 and Canco2 are affiliated persons and are related to each other.

16.   The fourth sentence in the second paragraph of Paragraph 43 is amended to read as follows:

On the other hand, for U.S. federal income tax purposes, the sale of Preferred Shares by Canco1 to New LP in paragraph 27 above and the subsequent reacquisition of such shares by Canco1 pursuant to the Purchase and Forward Repurchase Agreement entered into between the parties in paragraphs 27 and 28 above are intended to be disregarded, and Canco2 is intended not to be viewed as the beneficial owner of the Preferred Shares for U.S. federal income tax purposes during the term of the Purchase and Forward Repurchase Agreement.

Amended rulings and comments

Based on the amendments described above, we hereby make the following amendments to the Rulings and Comments sections of the AITR:

1.    Ruling B is amended to read as follows:

The dividends received by New LP in respect of the Preferred Shares in a particular year will be taxable dividends and, pursuant to subsection 112(1), an amount equal to the gross amount of those dividends will be deductible in computing the taxable income of the LP Partner for the year in which the dividends are received and allocated by New LP to the LP Partner in accordance with subsection 96(1). For greater certainty, such deductions will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4).

2.    Paragraphs (e) and (f) of the Comments are amended to read as follows:

(e) any tax consequences relating to the compensation paid by Canco2 to Canco1 for the use of its tax attributes;

(f) the reasonableness of the allocations, in respect of dividends received by New LP on the Preferred Shares, of income under subsection 96(1) and of deductions under subsection 112(1) by New LP to the LP Partner;

Confirmation

Other than as noted in the “Amended rulings and comments” section of this letter, we hereby confirm that the amended facts and proposed transactions set out above do not affect the rulings given in the AITR and that they will continue to be binding on the Canada Revenue Agency, subject to the conditions and limitations stated in the AITR. We also confirm that the opinions given in the AITR are not affected by these amended facts and proposed transactions, but remind you that those opinions are not binding on the Canada Revenue Agency.

Yours truly,

XXXXXXXXXX
Section Manager
for Director
|International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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