30 November 1997 Ruling 9728513 - ISSUE OF UNITS

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) Interest deductible on borrowing to make a reduction of capital
2) Interest deductible on borrowing used to make the Payment
3) The unit is issued for an amount equal to the Principal Amount and no proceeds are allocated to the Warrant
4) The payment will be deductible pursuant to 20(1)(e)(ii)
5) The interest payable by ACo to non-residents of with whom ACo deals at arm's length will be exempt from 212(1)(b) of the Act
6) Subsection 214(15) will not apply to the Payment
7) GAAR will not apply

Position:

1) Borrowing OK to the extent of paid-in capital
2) OK incurred to earn income
3) The Unit is issued for an amount equal to the Principal amount and no proceeds allocated to the Warrant
4) The Payment will be deductible pursuant to 20(1)(e)(ii)
5) OK
6) OK
7) GAAR will not apply

Reasons:

1) Meets administrative position
2) Previous ruling given
3) The Unit is considered to be one property
4) Meets criteria of 20(1)(e)(ii)
5) No principal to be repaid within 5 years, events of default are a triggering event and 	meet criteria of commercial reality, must be beyond control of the lender and must not 	be contrived
6) It is not a guarantee fee or standby fee
7) GAAR committee

XXXXXXXXXX
XXXXXXXXXX 						972851
XXXXXXXXXX 

Attention : XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX and various phone calls requesting an advance income tax ruling on behalf of the above noted taxpayer.

To the best of your knowledge and that of the above noted company, none of the issues or matters involved in this advance income tax ruling request have been or are being considered by a District Tax Services Office or a Taxation Centre in connection with a tax return already filed nor are any of the issues under objection and/or appeal.

In this letter, the following terms have the meanings specified:

a) Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1 as amended ( the “Act”) and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless indicated otherwise;

b) ACo means XXXXXXXXXX and is more fully described in paragraph 1 below;

c) BCo means XXXXXXXXXX and is more fully described in paragraph 5 below;

d) CCo means XXXXXXXXXX and is more fully described in paragraph 7 below;

FACTS

1. ACo is incorporated under the XXXXXXXXXX. The principal business of ACo is XXXXXXXXXX in Canada. ACo files its T2 Corporation Income Tax Returns with the XXXXXXXXXX Taxation Centre and it’s business number is XXXXXXXXXX.

2. XXXXXXXXXX.

ACo is a private corporation and a taxable Canadian corporation within the meanings assigned by subsection 89(1) of the Act.

3.

XXXXXXXXXX.

The term paid-up capital (“PUC”), as used here and subsequently, has the meaning assigned by subsection 89(1) of the Act.

4. ACo's unaudited entity financial statements as at XXXXXXXXXX, report an accumulated deficit of approximately CAN$XXXXXXXXXX.

5. BCo is a corporation formed under the laws of XXXXXXXXXX Its head office is at XXXXXXXXXX. BCo is a non-resident of Canada for the purposes of the Act.

XXXXXXXXXX.

6.

XXXXXXXXXX.

7. CCo is a corporation formed under the laws of XXXXXXXXXX. Its head office is at XXXXXXXXXX. CCo is a non-resident of Canada for the purposes of the Act.

8.

XXXXXXXXXX.

9. XXXXXXXXXX.

The common shares outstanding of CCo are widely held by the general public.

10.

XXXXXXXXXX.

11. In computing its income for a taxation year, ACo regularly follows the accrual method and deducts its interest expense on a payable basis (as contrasted to deducting interest expense on a paid basis).

PROPOSED TRANSACTIONS

12. ACo proposes to offer for sale units (the "Units") which represent the following obligations of ACo and CCo:

(a) a United States dollar debt obligation of ACo (evidenced by a "Bond");

(b) a guarantee (a "Guarantee") granted by CCo to a holder (a "Holder" means a person in whose name a Unit is registered) in respect of the above-mentioned debt obligation;

(c) a right granted by CCo to a Holder (evidenced by a "Warrant") to exchange the above-mentioned debt obligation for common stock of CCo ("CCo Stock").

The exchange right evidenced by a Warrant cannot be traded separately from the debt obligation evidenced by a Bond.

13. The Units will be purchased by a group of investment banking companies (the "Initial Purchasers") and resold to certain institutional buyers in private transactions in the United States and to certain non-United States persons in Europe and elsewhere. Pursuant to the purchase agreement, the Initial Purchasers may be given an option to purchase additional Units solely to cover over-allotments, if any. It is anticipated that ACo will issue Units having an aggregate subscription price of US$ XXXXXXXXXX.

14. The Units will be issued under a unit agreement (the "Unit Agreement") among ACo, CCo, an institutional unit agent (the "Unit Agent") and the Holders from time to time of the Units.

15. The Units, which will be listed on the XXXXXXXXXX Stock Exchange, will be offered in registered form only. The initial placement and initial resale of the Units and the CCo Stock issuable upon exercise of the exchange rights (the "Underlying Stock") (see below) will not be registered under the United States Securities Act of 1933, as amended (the "Securities Act"). Subsequent resales of the Units and Underlying Stock may be registered under the Securities Act pursuant to a registration rights agreement to be entered into by ACo and CCo for the benefit of the Holders.

16. The rights and obligations of ACo under the Units are summarized below:

(a) Term to Maturity. The maturity date ("Stated Maturity") of the Units will be the XXXXXXXXXX anniversary of the date on which the Units are issued (the "Issue Date").

(b) Principal Amount. The principal amount of the debt obligation under a Unit (evidenced by a Bond) will be US$ XXXXXXXXXX (the "Principal Amount"), which will be equal to the issue price of a Unit. It is therefore anticipated that the aggregate principal amount of ACo's debt obligation under the Units will be US$XXXXXXXXXX.

(c) Interest. The Units will accrue interest (the "Interest"), which will be payable semi-annually, on their Principal Amount at a specified annual interest rate (computed on the basis of a 360-day year composed of twelve 30-day months commencing on the Issue Date of the Units) (the "Specified Rate") throughout the period during which the Units remain outstanding.

(d) Additional Amounts. Under the Unit Agreement, ACo may be required in certain circumstances to pay Holders of Units such additional amounts as may be necessary in order that every net payment of amounts due in respect of the debt obligation thereunder will be grossed up for the amount of any deductions or withholding for any present or future tax (including Canadian non-resident withholding tax).

(e) Stated Amount at Maturity. The amount payable ("Stated Amount at Maturity") by ACo on the Stated Maturity of a Unit will be the Principal Amount, plus any accrued and unpaid Interest.

(f) Redemption of the Units at the Option of ACo. The Units will not be redeemable by ACo until after the XXXXXXXXXX anniversary of the Issue Date of the Units. Thereafter, the Units will be redeemable at the option of ACo at any time (the "Redemption Date") in whole for a redemption price (the "Redemption Price") equal to their Principal Amount plus the amount of Interest that has accrued as of the Redemption Date, subject to the ability of the Holders to exercise the exchange rights evidenced by the Warrants and receive CCo Stock following delivery of the notice of redemption.

To redeem Units, ACo will be required to mail a notice of redemption to each Holder not less than 30 days and not more than 60 days before the Redemption Date, stating, among other things (a) the Redemption Date, (b) the Redemption Price, and (c) the procedures that Holders must follow to collect the Redemption Price.

On the Redemption Date, ACo will be required to make a cash payment equal to the Redemption Price to those Holders who surrender their Units for redemption.

(g) Change in Control Covenant. If a Change in Control (as defined below in this subparagraph) of CCo occurs, each Holder will have the right, at the Holder's option, to require ACo to purchase all or any part of the Holder's Units on the date (the "Repurchase Date") that is 45 days after the date ACo gives notice of the Change in Control at a price (the "Repurchase Price") equal to 100% of their Principal Amount plus accrued Interest to the Repurchase Date.

On or before the 30th day after the occurrence of a Change in Control, ACo is obligated to give notice to each Holder of Units of the occurrence of such Change in Control, the date by which the repurchase right must be exercised, the Repurchase Price and the procedures which the Holder must follow to exercise this right. To exercise the repurchase right, the Holder of a Unit must deliver, on or before the 5th day prior to the Repurchase Date, written notice (the "Repurchase Notice") to ACo (or an agent designated by ACo for such purpose) of the Holder's exercise of such right, together with the certificates evidencing the Unit or Units with respect to which the right is being exercised, duly endorsed for transfer.

ACo will be required to pay, on the business day following the Repurchase Date, the Repurchase Price in cash to a Holder of Units for which a Repurchase Notice has been given.

For the purpose of the Change in Control Covenant, a Change in Control of CCo will be deemed to have occurred at such time as:

i) Any person (including any group deemed to be a "person" under section 13(d)(3) of the United States Securities Exchange Act of 1934, as amended, other than CCo, any subsidiary of CCo or any employee benefit plan of CCo or any person or entity organized, appointed or established by CCo for or pursuant to the terms of any such plan) is or becomes the beneficial owner, directly or indirectly, of shares of capital stock of CCo entitling such person to exercise more than 50% of the total voting power of all shares of capital stock of CCo entitled to vote generally in the election of directors; or

ii) There occurs (a) any consolidation of CCo with, or merger of CCo into, any other person; (b) any merger of another person into CCo, or (c) any sale or transfer of all or substantially all of the assets of CCo to another person (other than a merger which does not result in any change, reclassification, conversion, exchange or cancellation of outstanding shares of common stock of CCo);

provided, however, that a Change in Control shall not be deemed to have occurred if at least 80% of the value of the consideration paid to holders of common stock of CCo who fail to exercise any rights of election as to the kind and amount of consideration payable in connection with such transaction or transactions consists of shares of common stock traded on a national securities exchange or quoted on the XXXXXXXXXX and as a result of such transaction or transactions, the debt obligations under the Units become convertible into such consideration.

(h) Events of Default. Under the Unit Agreement, Events of Default will include:

i) default in the payment of the Stated Amount at Maturity, Principal Amount, accrued Interest, Redemption Price or Repurchase Price in respect of the Units when the same becomes due and payable;

ii) failure by ACo or CCo to comply with any of its agreements under the Unit Agreement or the Guarantee (other than those referred to above in (i)) and the continuation of such failure for 60 days after receipt by ACo of written notice of such default;

iii) failure to pay at final maturity (either at stated maturity or on acceleration of the maturity) of the principal of any indebtedness of ACo or CCo in excess of US$XXXXXXXXXX, if such default in payment or acceleration has not been cured or rescinded; and

iv) certain events of bankruptcy, insolvency or reorganization by ACo or CCo.

The Unit Agreement will provide that if an Event of Default (other than an Event of Default referred to in (iv)) occurs and is continuing, the Unit Agent, or the Holders of at least 25% in aggregate Stated Amount at Maturity of the outstanding Units at the relevant time, by notice in writing to ACo (and to the Unit Agent if given by Holders) may declare the Principal Amount plus accrued Interest to the date of declaration (the "Default Date", also to include the date on which an Event of Default referred to in (iv) occurs) to be immediately due and payable. If any Event of Default referred to in (iv) occurs, the Principal Amount plus accrued Interest to the Default Date will become immediately due and payable without any declaration or other act on the part of the Unit Agent or the Holders.

(i) Ranking. The debt obligations under the Units will be unsecured obligations of ACo, and will be subordinate to all present and future unsubordinated indebtedness of ACo. The Unit Agreement does not limit or restrict the amount of or the terms and conditions of other indebtedness which may be incurred or issued by ACo, nor does it contain any financial or similar covenants of, or restrictions on, ACo.

17. The rights and obligations of CCo under the Units are summarized below:

(a) Guarantee. Under the Guarantee, ACo's debt obligations under the Units will be fully and unconditionally guaranteed as to repayment of the Principal Amount and accrued Interest by CCo. The guarantee by CCo will be subordinate to all present and future unsubordinated indebtedness of CCo.

(b) Exchange Rights. The expiration date ("Expiration Date") of the exchange rights evidenced by Warrants (the "Exchange Rights") will be the XXXXXXXXXX anniversary of the Issue Date. On the exercise of the Exchange Rights at any time before the close of business on the Expiration Date (the "Exercise Date"), the Holder of a Unit has the right to receive a fixed number of shares of CCo Stock. The number of shares of CCo Stock for which each Exchange Right is exercisable will be based on an exercise price (the "Exercise Price") for the CCo Stock, which will be set at the time of issue of the Units, and which will remain constant over the term of the Unit, subject to certain standard anti-dilution adjustments. The Exercise Price will be approximately XXXXXXXXXX % of the market price (on the XXXXXXXXXX Stock Exchange) of the CCo Stock (XXXXXXXXXX) on the date on which the offering of the Units is priced. As sole consideration for CCo Stock to be acquired on the exercise of the Exchange Right, the Holder will be required to surrender the Unit to CCo.

Fractional CCo Stock will not be issued on the exercise of the Exchange Right by a Holder. A Holder otherwise entitled to receive a fractional share of CCo Stock will receive a cash payment in United States dollars equal to the market value of such fractional share on the Exercise Date.

On the exercise of the Exchange Right, the Holder will not be entitled to receive any cash payment from ACo or CCo representing any Interest on the surrendered Unit accruing since the preceding semi-annual interest payment date. The CCo Stock transferred to the Holder on the exercise of the Exchange Right, together with the cash payment, if any, received by the Holder in lieu of a fractional share will fully satisfy CCo's obligation to pay for the Unit surrendered by the Holder.

The obligation to issue CCo Stock on the exercise of the Exchange Right by a Holder is solely that of CCo. Except in the event of an Event of Default (as defined above) or a Change in Control (as defined above), under no circumstances will ACo be obliged to pay any portion of the Principal Amount of the Units prior to the redemption of the Units at the option of ACo or the Stated Maturity.

18. As discussed above, it is anticipated that the ultimate purchasers of Units will be institutional investors formed under the laws of the United States and individuals and corporations that are resident, or formed under the laws of European and other jurisdictions (other than the United States).

19. ACo will use the proceeds from the issuance of Units:

(a) to pay to CCo an arm's length fee (estimated to be approximately US$XXXXXXXXXX) (the "Payment") in respect of the provision of the Exchange Rights (evidenced by the Warrants) by CCo to the Holders; and

(b) for the purpose of earning income from business or property;

(c) for the purpose of returning capital on its issued XXXXXXXXXX shares outstanding, the proceeds from the issuance of which were used for the purpose of earning income from business or property, to repay amounts previously borrowed for the purpose of earning income from business or property, or to repay amounts payable for property acquired for the purpose of gaining or producing income therefrom or from a business;

(d) to repay amounts previously borrowed for the purpose of earning income from business or property (or deemed by subsection 20(3) of the Act to have been borrowed for such purpose) (XXXXXXXXXX ); or

(e) to repay any amounts payable for property acquired for the purpose of gaining or producing income therefrom or from a business (or deemed by subsection 20(3) of the Act to be payable for such purpose).

PURPOSE OF THE PROPOSED TRANSACTIONS

20. The Units will be issued to raise funds necessary to meet ACo's business requirements and/or to refinance existing capital sources of ACo.

RULINGS GIVEN

Provided that the preceding statements of fact are accurate and complete and the proposed transactions are carried out as described above, the following rulings are provided:

A. The debt obligation of ACo under a Unit will be considered to have been issued for an amount equal to its Principal Amount and no portion of such issue proceeds will be separately allocated to the Warrant.

B. The amount of the Payment as described in paragraph 19(a) above will deductible by ACo in computing its income pursuant to subparagraph 20(1)(e)(ii) of the Act, to the extent such Payment is reasonable in the circumstances.

C. Provided that the stated capital of the XXXXXXXXXX shares of ACo owned by BCo immediately prior to the reduction in the stated capital of those shares is equal to or greater than the amount paid upon the reduction of the stated capital of those shares, the interest or a reasonable amount in respect thereof on the portion of the monies received upon the issuance of the Bond which is used to return capital of those shares will be deductible pursuant to paragraph 20(1)(c) of the Act in computing the income of ACo for the taxation year in respect of which such expense is paid or payable, depending on the method regularly followed by ACo in computing its income.

D. In computing it’s income for a taxation year, ACo will be entitled to deduct pursuant to paragraph 20(1)(c) of the Act the lesser of the interest paid or payable in respect of that year or a reasonable amount in respect thereof on the portion of the monies received on the issuance of the Bond that is used by ACo to fund the Payment to CCo.

E. Provided that ACo is entitled to claim a deduction pursuant to 20(1)(c) of the Act on the interest paid or payable in respect of the amounts previously borrowed or payable for property acquired as described in 19(d) and (e) above, pursuant to subsection 20(3) of the Act, it will be entitled to deduct, in computing its income for a taxation year, the lesser of the interest paid or payable or a reasonable amount in respect thereof in respect of that taxation year on the portion of the monies received on the issuance of the Bond that is used to repay these amounts.

F. The interest payable by ACo to a Holder of a Unit who is a non-resident of Canada and with whom ACo is dealing at arm’s length will be exempt from the application of paragraph 212(1)(b) of the Act by virtue of the provisions of subparagraph 212(1)(b)(vii) of the Act.

G. For the purposes of Part XIII of the Act, the Payment will not be considered to be a guarantee fee or standby charge as described in subsection 214(15) of the Act.

H. Subsections 15(1), 56(2), and 246(1) of the Act will not apply as a result of the Payment by ACo to CCo for the Exchange Right.

I. The provisions of subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.

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

Our rulings are based on the Act in its present form and do not take into consideration any proposed amendments to the Act.

Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any tax implications of the facts and proposed transactions.

Comment

Nothing in this ruling should be construed as implying that Revenue Canada, Taxation has agreed to or reviewed the determination of the reasonableness or fair market value of the Payment described in 19(a) above, or the determination of ACo’s accumulated profits, adjusted equity or the fair market value or PUC of the XXXXXXXXXX shares.

Opinion

Provided the provisions of proposed subsection 20.2(1) of the Act are enacted in substantially the same form as is proposed in the Draft Legislation, proposed 20.2(1) of the Act will apply to ACo in respect of the portion of the monies received upon the issuance of the Bonds which is used to return capital as described in 19(c) above. Accordingly this amount shall be deemed to be borrowed money used for the purposes of earning income from the business carried on by ACo to the extent that the amount does not exceed ACo’s adjusted equity immediately before the distribution. Moreover, future interest deductions on the borrowing will be based on the adjusted equity at the time of the distribution and the provisions of paragraph 20(1)(c) of the Act will determine in each year, the interest deduction available for that particular year.

The foregoing opinion is given in accordance with the practice referred to in paragraph 22 of IC-70-6R3 and is not binding on Revenue Canada, Taxation.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate