2006 Ruling 2006-0204011R3 - Withholding Tax

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Minor change to payment date and request of further rulings.

Position: Amended.

Reasons: Change does not affect ruling provided

XXXXXXXXXX 							2006-020401

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling 2006-019419 - XXXXXXXXXX ("A Co")

This is in reply to your letter of XXXXXXXXXX and e-mails of XXXXXXXXXX, wherein you request the following amendments to our advance income tax ruling number 2006-019419 (the "Ruling") issued XXXXXXXXXX, 2006 on behalf of the above-named corporation. All capitalized terms not defined herein are as defined in the Ruling.

The Ruling is revised as follows:

1) In the Definitions, the following definition is added:

(mm) "Make-Whole Amount" means, in the case of any voluntary prepayment of the Term Loan B, the excess, if any, of (a) the aggregate present value as of the date of such prepayment of (i) each dollar of principal being prepaid, (ii) the amount of interest (exclusive of interest accrued to the date of prepayment) that would have been payable in respect of such dollar if such prepayment had not been made, calculated from the date of such prepayment through and including the XXXXXXXXXX -year anniversary of the Term Loan B issue date, and (iii) a premium equal to XXXXXXXXXX % of the amount of such principal that would have been payable on the XXXXXXXXXX -year anniversary of the issue date of Term Loan B if such prepayment had not been made, over (b) the aggregate principal amount of the Term Loan B being prepaid.

2) The date "...XXXXXXXXXX ..." after "...principal payments of $XXXXXXXXXX commencing ..." in the last sentence of paragraph 8 of the Ruling will be replaced by the date "...XXXXXXXXXX ...".

3) At the end of paragraph 10 of the Ruling, the following sentences are added:

"A Co will be required to pay certain non-refundable fees, including a closing fee (the "Closing Fee") of $XXXXXXXXXX to be paid on closing, and a loan servicing fee (the "Loan Servicing Fee") in the amount of $XXXXXXXXXX to be paid XXXXXXXXXX until the Final Maturity Date. Further, A Co will be required to pay loan audit and collateral monitoring fees (the "Monitoring Fees") in the amount of $XXXXXXXXXX per day per examiner plus reasonable costs and expenses incurred by examiners and third parties if representatives of the Agent visit any or all of the Lenders to conduct audits, inspections, valuations and/or field examinations."

4) At the end of paragraph 13 of the Ruling, the following sentences are added:

"The prepayment premiums will be as follows:

The Term Loan A prepayment premium (the "Term Loan A Prepayment Premium") -

XXXXXXXXX% of the prepayment if the prepayment is made in the first year,
XXXXXXXXX% of the prepayment if prepayment is made in the second year,
XXXXXXXXX% of the prepayment if the prepayment is made in the third year,
XXXXXXXXX% of the prepayment if the prepayment is made in the fourth year and

XXXXXXXXX, thereafter.

The Term Loan B prepayment premium (the "Term Loan B Prepayment
Premium") -

the Make-Whole Amount, if the prepayment is made in the first two years,
XXXXXXXXX % of the prepayment if the prepayment is made in the third year,
XXXXXXXXX % of the prepayment if the prepayment is made in the fourth year and

XXXXXXXXX, thereafter."

Further, the Ruling is revised to add after Ruling B the following:

C. The Loan Servicing Fee and Monitoring Fees, as stated in 10 above, paid by A Co to non-resident Lenders pursuant to the terms of the Financing Agreement will be exempt from withholding taxes pursuant to subparagraph 212(1)(b)(vii) of the Act provided that at the time of payment the Lenders deal at arm's length with A Co.

D. Provided that the amount of Term Loan A Prepayment Premium to be paid to the Lenders, as stated in 13 above, does not exceed the value at that time of the payment of the interest that would have been paid or payable by A Co as interest on Term Loan A for taxation years ending after that time, such payment will, pursuant to paragraph 18(9.1)(e) and (f) of the Act, be deemed to have been paid by A Co and received by the Lenders as interest on Term Loan A and, accordingly, these provisions will deem the Term Loan A Prepayment Premium to be paid to such non-resident Lenders who deal at arm's length with A Co as interest payable for purposes of subparagraph 212(1)(b)(vii) of the Act.

E. Provided that the amount of Term Loan B Prepayment Premium to be paid to the Lenders, as stated in 13 above, does not exceed the value at that time of the payment of the interest that would have been paid or payable by A Co as interest on Term Loan B for taxation years ending after that time, such payment will, pursuant to paragraph 18(9.1)(e) and (f) of the Act, be deemed to have been paid by A Co and received by the Lenders as interest on Term Loan B and, accordingly, these provisions will deem the Term Loan B Prepayment Premium to be paid to such non-resident Lenders who deal at arm's length with A Co as interest payable for purposes of subparagraph 212(1)(b)(vii) of the Act.

We confirm that the Ruling, as amended herein, remains binding on the Canada Revenue Agency subject to the same limitations and qualifications set out in the Ruling.

Comments:

As the Closing Fees have been paid, this is a completed transaction. Further to paragraph 7 of Information Circular IC 70-6R5, entitled Advance Income Tax Rulings, dated May 17, 2002, advance rulings are not issued on completed transactions, nor are such transactions covered in our position as outlined in Income Tax Technical News No.34, dated April 27, 2006, that was provided in response to question 5 of the Review of the Advance Income Tax Rulings Process. Accordingly, we cannot rule on that particular transaction. We can, however, provide the following general comments.

Under paragraph 214(15)(b) of the Act, an amount paid or credited as consideration for an agreement to lend money is deemed to be an interest payment only when the non-resident lender would be liable to Part XIII tax on any interest payable on the obligation issued under the terms of the agreement. Otherwise, the amounts paid or credited as consideration for the agreement retain their basic characteristics and are not deemed to be interest payments.

In our view, where a closing fee is paid in respect of a loan that satisfies all the requirements of subparagraph 212(1)(b)(vii) of the Act, such that the interest on the loan would not be subject to withholding tax, the closing fee is also not subject to withholding tax under Part XIII of the Act.

Yours truly,

XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch