6 March 2000 External T.I. 1999-0013555 - CROSS DEFAULTS

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 Defaults by members of a corporate group not party to a loan agreement an acceptable event of default for purposes of subparagraph 212(1)(b)(vii)?

Position: depends on particular facts - rulings have been issued where defaults of sister or subsidiary corps would cause default in borrower's own loans

Reasons: Paragraph 15 of IT-361R3 which states that defaults by persons not parties to the agreement would usually not be considered a failure or default is based on R.J. Read's 1983 comments to the CTF where the persons not party to the agreement were governments, regulatory bodies, and courts

XXXXXXXXXX  							1999-001355
B. Kerr
Attention: XXXXXXXXXX 

March 6, 2000

Dear Sirs:

Re: Cross Defaults Subparagraph 212(1)(b)(vii)

This is in response to your letter of December 3, 1999, wherein you requested our views on whether cross defaults are acceptable events of defaults for the purposes of subparagraph 212(1)(b)(vii) of the Income Tax Act (the "Act").

You described a situation involving loans to various members of a corporate group. The credit agreement will contain a list of events of default that permit acceleration of the loans. For example a default by any member of the corporate group even if not a party to the credit agreement will result in acceleration of the loans. You have stated that each of listed events of default has commercial reality, is beyond the control of the lenders and is not contrived.

Our Comments

The situation outlined in your letter involves an actual fact situation relating to a proposed transaction. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular IC-70-6R3 dated December 30, 1996, issued by Revenue Canada. However, we can offer the following general comments.

The Agency's general views on the provisions of subparagraph 212(1)(b)(vii) of the Act are outlined in Interpretation Bulletin IT-361R3. As stated in paragraph 15 thereof, an "event of failure or default" under the terms of a loan agreement is one that has commercial reality, is beyond the control of the lender and is therefore not contrived. In addition, the paragraph goes on to state that such an event that occurs as a consequence of an act by a person or persons who are not a party to the loan agreement is usually not considered a failure or default for the purposes of 212(1)(b)(vii).

However, we would generally not expect that this latter comment would be applicable to a situation such as described by you and would be willing to further consider the matter, in the context of an advance income tax ruling, based on its particular facts including, among others, the relationships between the borrower and other members of the corporate group, the reasons for the particular cross-default provision, etc.

We trust that these comments will be of assistance.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch