2007 Ruling 2007-0245201R3 - Withholding Tax Exemption

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: Does the maintenance of a collateral account preclude the application of 212(1)(b)(vii)?

Position: NO

Reasons: Given before in similar circumstances

XXXXXXXXXX 							2007-024520

XXXXXXXXXX , 2007

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling XXXXXXXXXX ("Canco") BN XXXXXXXXXX.

This is in reply to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-named taxpayer.

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

(i) dealt with in an earlier return of Canco or a related person;

(ii) being considered by any tax services office or taxation centre in connection with a tax return already filed;

(iii) under objection by Canco or by a related person;

(iv) the subject of a previously issued ruling by the Income Tax Rulings Directorate of the CRA to Canco or a related party; nor

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.

Except as otherwise stated, a reference in this Ruling to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act (the "Act").

Throughout the Ruling, the singular should be read as plural and vice versa where the circumstances so require. Unless, otherwise specified all references to dollars are references to Canadian dollars.

Definitions:

Except as otherwise indicated, the following terms have the meanings specified below:

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof;

(b) "Borrower" means Canco;

(c) "Canco" means XXXXXXXXXX;

(d) "Cash Collateral Account" means the cash collateral account described in 13 below;

(e) "Cash Sweeps" means an amount from the proceeds of the refinancing of a Property that exceeds the amount required to pay the indebtedness in respect of that Property;

(f) "CRA" means the Canada Revenue Agency;

(g) "Closing" means the date on which the agreements governing the Facilities are signed, which is proposed to occur on or before XXXXXXXXXX;

(h) "Facilities" means Facility A and Facility B;

(i) "Facility A" means the $XXXXXXXXXX multi-draw term credit facility to be provided by Lender to Borrower, as described in 4 to 14 below;

(j) "Facility B" means the $XXXXXXXXXX multi-draw term credit facility to be provided by Lender to Borrower, as described in 4 to 14 below;

(k) "Lender" means XXXXXXXXXX, a XXXXXXXXXX resident company currently in the process of incorporation;

(l) XXXXXXXXXX;

(m) "Properties" means XXXXXXXXXX;

(n) "Sunset Clause" means the provision described in 14 below; and

(o) "Term Sheet" means the Facilities term sheet between Borrower and an affiliate of Lender.

Facts:

1. Borrower was incorporated under the XXXXXXXXXX by certificate of incorporation dated XXXXXXXXXX. The head office of Borrower is in XXXXXXXXXX, and Borrower is a private corporation and a taxable Canadian corporation for purposes of the Act.

2. Borrower carries on the business of XXXXXXXXXX in Canada.

3. Borrower and Lender will deal with each other at arm's length for purposes of the Act.

4. On XXXXXXXXXX Borrower and an affiliate of Lender executed a commitment letter pursuant to which the affiliate of Lender committed (acting individually or through one of its affiliates) to provide $XXXXXXXXXX of financing consisting of (a) $XXXXXXXXXX through Facility A and (b) $XXXXXXXXXX through Facility B. Both Facilities are to be denominated in Canadian dollars.

Proposed Transaction:

5. Borrower will enter into agreements governing the Facilities with Lender on Closing. The Facilities are intended to meet the requirements of the exemption from Canadian withholding tax provided in subparagraph 212(1)(b)(vii) of the Act.

6. Borrower will be entitled to draw down amounts under Facility A upon the completion of all necessary approvals, including Lender's right (i) in the case of XXXXXXXXXX, to approve such Property on terms mutually agreed by the Lender and Borrower, (ii) in the case of XXXXXXXXXX, to approve such XXXXXXXXXX based on Lender's satisfaction, acting reasonably, with the budget, including XXXXXXXXXX.

7. Borrower will, on Closing, draw down an amount under Facility B sufficient to repay certain existing debt of Borrower. Borrower may also draw down amounts to make distributions to its shareholders, provided certain events have occurred and certain tangible net worth targets have been met.

8. Borrower will not be entitled to draw down any amount under either Facility after XXXXXXXXXX.

9. The maturity date for the Facilities will be XXXXXXXXXX.

10. The terms of the Facilities will provide that the interest rate for both Facility A and Facility B will be XXXXXXXXXX % per annum. Borrower will pay an annual standby fee of XXXXXXXXXX% of the undrawn balance of Facility A. No standby fee will be payable after XXXXXXXXXX. Borrower will pay a fee equal to XXXXXXXXXX% of each advance under Facility B.

11. Borrower will be entitled to voluntarily prepay amounts owing under the Facilities at any time, subject to a penalty equal to XXXXXXXXXX% of the undrawn balance at the time of repayment if repayment occurs prior the first anniversary of the first draw down under the Facilities, XXXXXXXXXX% if repayment occurs prior to the second anniversary thereof and XXXXXXXXXX% if repayment occurs prior to the third anniversary thereof. If the Lender unreasonably fails to approve the financing of XXXXXXXXXX Properties, Borrower will be entitled to voluntarily prepay all amounts owing under the Facilities, subject to a penalty equal to XXXXXXXXXX% of the then outstanding principal amount of the Facilities.

12. Borrower will be required to apply (a) proceeds of refinancing or sale of any Properties and (b) Cash Sweeps, to repay the Facilities, provided that in no event shall Borrower be required to repay more than 25% of the principal amount of any advance on or before the XXXXXXXXXX anniversary of the making of such advance.

13. Amounts that Borrower would be required to use to repay the Facilities but for the 25% cap on mandatory repayments described in 12 above will be deposited to a Cash Collateral Account of Borrower. Borrower will grant a first ranking charge and security interest in the Cash Collateral Account to Lender. Proceeds deposited in the Cash Collateral Account will be invested in permitted investments to be specified in the agreements governing the Facilities, and will only be available to be applied by Borrower to make permitted repayments of advances under the Facilities or to be invested in XXXXXXXXXX. Use of Cash Collateral Account funds to invest in XXXXXXXXXX will be subject to the same restrictions as on draw downs under Facility A, as described in 6 above, and Borrower will also be required to meet certain tangible net worth tests. Borrower will not be permitted to make any distributions of any amounts to its shareholders or to draw down any amounts under the Facilities as long as there are any amounts standing in the Cash Collateral Account.

14. The terms of the Facilities will provide that upon the coming into force of amendments to the Act eliminating Canadian withholding tax on interest paid to arm's length persons, the terms will be automatically deemed to be amended to eliminate, inter alia, the 25% cap on mandatory repayments as described in 12 and 13 above (the "Sunset Clause").

Purpose of Proposed Transactions:

15. The purpose of the proposed transactions is to obtain financing for XXXXXXXXXX, refinance existing indebtedness of Borrower, fund distributions to the shareholders of Borrower as well as to pay certain fees and expenses in respect of the Facilities.

Ruling Given:

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and that the final agreements referred to herein are substantially the same as described herein, and provided further that the proposed transactions are contemplated in the manner described above, we rule as follows:

The maintenance by the Borrower of a Cash Collateral Account as described in 13 above will not, in and of itself, preclude the application of the exemption from withholding tax in subparagraph 212(1)(b)(vii) of the Act to interest or deemed interest paid by Borrower in respect of the Facilities to any non-resident person who, for purposes of the Act, deals at arm's length with Borrower.

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 dated May 17, 2002, issued by the CRA, and is binding provided the proposed loans are advanced on or before XXXXXXXXXX.

This ruling is based on the Act as it currently reads and does not take into account any future amendments, whether currently proposed or not, to the Act.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:

(i) the GST implications of any of the proposed transactions;

(ii) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein; nor

(iii) the nature of the legal relationship entered into or contemplated by the entities named above.

Yours truly,

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