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:
1)whether 51.1(b) applies to a debt obligation where the holder's right to exchange can be exercised only after the issuer gives notice that it may be exercised;
2)whether Part XIII withholding tax (subparagraph 212(1)(b)(vii)) is required on payments of interest under such a debt obligation where issuer may give such notice within 5 years of debt's issue.
Position:
1)yes;
2) yes.
Reasons:
1)the terms of the debt provide for the right, and the right is exercisable, at the time section 51.1 applies;
2)the possibility that the holder can exercise the right to convert within 5 years (albeit only after the issuer's permission) is sufficient to conclude that the issuer may be obliged to pay 25% of the principal amount.
XXXXXXXXXX 972140
Attention: XXXXXXXXXX
September 9, 1997
Dear Sirs:
Re: Conversion of Debt Obligation
This is in reply to your letter of August 4, 1997, in which you describe a debt obligation one of the terms of which provides that it is convertible at the option of the holder into another debt obligation of the same issuer provided that the issuer has first given notice to the holders allowing them to make such a conversion. You ask whether it is our view that such an instrument meets the condition in paragraph 51.1(1)(b) of the Income Tax Act (the "Act"). Furthermore, you ask whether it is our view that the possibility that the issuer may give such notice within 5 years of the issue of the debt amounts to a circumstance under which the issuer "may be obliged to pay more than 25% of ... the principal amount of the obligation within 5 years from the date of issue of that ... obligation". Interest payable on such an obligation would be subject to non-resident withholding tax since the condition in subparagraph 212(1)(b)(vii) of the Act would not be satisfied.
Section 51.1 of the Act applies at a point in time, namely at the time of conversion. So long as the right to make the exchange is part of the terms of the debt obligation at that time the rollover will be available provided, of course, that the conditions in paragraphs 51.1(a) and (c) are also satisfied. Thus, a right of exchange which is part of the terms of the obligation from its inception or which becomes a term of the obligation at any time prior to the moment of exchange will satisfy paragraph 51.1(b) of the Act. In the situation described by you it is our view that the right to exchange exercised by the holder after the issuer gives notice fulfils the requirements of paragraph 51.1(b) of the Act.
With respect to your second query, in our view the phrase "under any circumstances" as used in subparagraph 212(1)(b)(vii) of the Act is worded broadly enough to clearly include the situation of a possible payment by the issuer even where both the issuer and holder must independently take steps to cause the holder's right of conversion to be exercised. In light of the explicit exclusion in clause 212(1)(b)(vii)(E) of the Act a holder's right to convert, of course, constitutes a circumstance under which the issuer is obliged to pay more than 25% of the principal amount of the obligation. See paragraph 2 of Interpretation Bulletin 361R3 ("Exemptions from Part XIII Tax on Interest Payments to Non-Residents") in this respect. It is our opinion that Part XIII withholding tax would be applicable, therefore, to amounts of interest payable under the debt obligation which you describe.
Although the foregoing comments are not binding on the Department, we trust they assist.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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