MRPS as example of specified share (p. 1090)
[I]f a Bermuda corporation funds a Luxembourg subsidiary by way of mandatorily redeemable preferred shares and the Luxembourg intermediary lends to a Canadian subsidiary at interest, that interest would be subject to full Canadian withholding tax of 25 percent, without any reduction under the Canada-Luxembourg tax treaty, because subsection 212(3.2) deems the Canadian borrower to pay the interest to the ultimate funder, the Bermuda corporation.
Potential application to dividend declared after particular debt has disappeared (p.1091)
[F]or the character substitution rules to apply, the dividend must be declared at or after the time the particular debt or other obligation referred to in paragraph (3.1)(a) is entered into. It remains uncertain whether a dividend declaration that occurs after the particular debt or other obligation has ceased to exist still triggers paragraph 212(3.6)(a). The text of the rule suggests that it might, but arguably this would not be an appropriate result.
Potential non-existence of the situation posited (p. 1092)
[I]t is utterly mysterious how a rent or royalty can be determined, in whole or in part, by reference to an amount of interest or how a relevant funding arrangement can be entered into because a specified royalty arrangement was entered into. While interest is compensation for the use or retention by one person of a sum of money owed to another rent is compensation for the use or occupation of property, or for the right to use or occupy property, and a royalty is compensation for the use of property, usually copyrighted material or natural resources, expressed as a percentage of receipts from using the property or as an account per unit produced. [fn: 23: The term "royalty" is also undefined for Part XIII ITA. … Mobil Oil Canada Ltd. v. R., 2001 FCA 333 adopted the following meaning…: …“Compensation for the use of property, usually copyrighted material or natural resources, expressed as a percentage of receipts from using the property or as an account per unit produced….] It is not clear how a logical or legal connection between interest, on the one hand, and rents or royalties, on the other, can exist as suggested by paragraph 212(3.6)(b).
Similarly, it is difficult to conceive of common situations in which rents or royalties are converted into interest or in which a particular relevant royalty arrangement was entered into because a debt or other obligation was entered into. Here, at least, some possibilities can be envisaged. Probably the only likely situation, which may fall under clause 212(3.92)(b)(i)(A), involves participating debt interest that tracks underlying rents or royalties or the value, production, or use of the underlying leased or licensed property. A more remote possibility involves money that has been lent to allow either the acquisition or development of tangible or intangible property that then has been leased or licensed. Arguably, however, the link between the two is too tenuous to meet the nexus requirements of clause 212(3.92)(b)(i)(B) in these situations.
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