1999 Ruling 9902423 - SERIES OF LOANS OR REPAYMENTS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether the settlement or repayment of a loan by offsetting against a dividend payment should be considered "part of a series of loans or other transactions or repayments" for purposes of subsection 15(2)

Position: Not part of a series.

Reasons: See detailed issue sheet for 3-971764

XXXXXXXXXX
XXXXXXXXXX 990242
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-referenced taxpayer.

The above-referenced taxpayer files its returns with the XXXXXXXXXX Tax Centre.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling request:

(a) is being considered by a tax services office or taxation centre in connection with a tax return already filed by the taxpayer or a related person,

(b) is under objection, and

(c) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.

Definitions

(a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Suppl.) c.1, as amended to the date hereof, and unless otherwise stated, every reference to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "Canco" refers to XXXXXXXXXX. As of XXXXXXXXXX Canco has transferred all of its operating assets to Cansub;

(c) "Cansub" refers to XXXXXXXXXX;

(d) "Finco" refers to XXXXXXXXXX;

(e) "principal amount" has the meaning assigned to that term by subsection 248(1);

(f) "private corporation" has the meaning assigned to that term by subsection 89(1);

(g) "Pubco" refers to XXXXXXXXXX a non-resident of Canada;

(h) "taxable Canadian corporation" has the meaning assigned to that term by subsection 89(1); and

(i) "U.S. Parent" refers to XXXXXXXXXX non-resident of Canada.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

Facts

1. Cansub is a wholly-owned subsidiary of Canco. Canco and Cansub are both private corporations and taxable Canadian corporations. As of XXXXXXXXXX, Cansub's issued and outstanding shares are XXXXXXXXXX class A common shares, XXXXXXXXXX class B common shares and XXXXXXXXXX class A preferred shares. Cansub's year end is XXXXXXXXXX.

2. U.S. Parent owns XXXXXXXXXX of Canco's common shares, being all of the issued and outstanding common shares. U.S. Parent also owns XXXXXXXXXX class A preferred shares of Canco. Finco owns XXXXXXXXXX class B preferred shares, XXXXXXXXXX class C preferred shares and XXXXXXXXXX class D preferred shares of Canco. Finco is a wholly-owned subsidiary of U.S. Parent.

3. U.S. Parent is an indirect subsidiary of Pubco. The common shares of Pubco are listed for trading on the XXXXXXXXXX Stock Exchange.

Proposed Transactions

4. Cansub will make one or more loans (the "Loans") to U.S. Parent during the 1999 calendar year in an aggregate amount approximately equal to its estimated net after-tax earnings (as computed under U.S. tax principles in U.S. dollars) for its fiscal year 1999. The Loans will be denominated in Canadian dollars and will be due on demand. The outstanding balance of the Loans may be adjusted (if necessary) during a particular calendar quarter in accordance with revised estimates of the net after-tax earnings of Cansub for the 1999 fiscal year. These adjustments may involve (i) Cansub advancing additional funds to US Parent in the event the revised estimate of the net after-tax earnings for the 1999 fiscal year is increased, or (ii) U.S. Parent repaying a portion of the Loan to reflect a reduction in the estimated net after-tax earnings for the 1999 fiscal year, so that the average balance of the Loans on a quarterly basis at any particular time will approximate or be equal to the estimated net after-tax earnings for the 1999 fiscal year.

The Loans will be evidenced by a single grid demand promissory note (the "1999 Note"), and will carry an interest rate equivalent to normal commercial interest rates for loans of such magnitude from third parties to U.S. Parent and in any event greater than any interest costs incurred by Cansub.

5. Cansub will make the Loans substantially out of internally generated funds. To the extent Cansub does not have available funds at the time of making a Loan, it will effect a bridge borrowing to make the Loan and will repay the same as funds become available.

6. Prior to XXXXXXXXXX, Cansub will declare a dividend or dividends to Canco for an amount equal to the principal amount of the 1999 Note at that time and pay the same prior to XXXXXXXXXX, by assignment of the 1999 Note to Canco. At the time of the dividend, the fair market value of the 1999 Note will be equal to its principal amount.

7. Subsequent to the payment of the dividend and assignment of the 1999 Note described in paragraph 6 above, and subsequent to the declaration of the dividend described in paragraph 8 below, U.S. Parent will repay that portion of the 1999 Note necessary to fund the dividends, described in paragraph 8 below, that will be paid to Finco on its preferred shares of Canco and to fund the withholding tax on the dividends, described in paragraph 8 below, that will be paid to U.S. Parent on its common and preferred shares of Canco.

8. Prior to XXXXXXXXXX, but subsequent to the declaration of the dividend described in paragraph 6 above, Canco will declare a dividend to U.S. Parent on its class A preferred shares of Canco and on its common shares of Canco in an aggregate amount equal to the then remaining balance of the 1999 Note divided by a factor of XXXXXXXXXX (under this calculation the amount of the dividend will equal the aggregate of the remaining balance of the 1999 Note and the portion of the above repayment that will not be used to fund the dividend payments to Finco. This portion of the repayment will also equal the 5% withholding tax exigible on the dividends to U.S. Parent). The dividends will be paid prior to XXXXXXXXXX, but subsequent to the payment of the dividend declared in paragraph 6 above, by way of settlement of the balance of the 1999 Note and a cash payment to Revenue Canada for the withholding tax payable on the dividends. A dividend (net of exigible withholding tax forwarded to Revenue Canada) will be declared and paid to Finco on its preferred shares of Canco in accordance with the terms of such shares.

9. Cansub will in XXXXXXXXXX make one or more demand loans to U.S. Parent in an aggregate amount equal to Cansub's estimated after-tax earnings for XXXXXXXXXX.

Purpose of the Proposed Transactions

As part of its worldwide tax planning it is beneficial for U.S. Parent to obtain full utilization of Canadian taxes paid by Cansub.

XXXXXXXXXX

Ruling

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is as follows:

A. Provided the proposed transactions described in paragraphs 4, 5, 6, 7 and 8 herein are completed prior to XXXXXXXXXX, the interaction of subsection 15(2) and paragraph 214(3)(a) will not apply to deem the amount of the Loans to have been paid to U.S. Parent as a dividend from a corporation resident in Canada.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and is binding on Revenue Canada provided that the proposed transactions are completed by XXXXXXXXXX.

This ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted into law, could have an effect on the ruling provided herein.

Comments

Nothing in this ruling should be construed as implying that Revenue Canada has agreed to or reviewed:

(a) the determination of the fair market value or adjusted cost base of any property referred to herein, or

(b) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.

It is our understanding that the series of transactions described in the ruling will be repeated on an annual basis indefinitely. The above ruling is in respect of the 1999 Note only and does not cover any other loans that may be made in the future.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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