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: 212(1)(b)(vii) event of default triggering event
Position: OK
Reasons: Funds to be pl;aced in an escrow account until the assets for which the funds were borrowed are acquired. If acquisition fails, borrower must make offer to repurchase notes. Failure to make offer is the triggering event. Also, escrow account is not considered to be a "cash collateral" account.
XXXXXXXXXX
XXXXXXXXXX 981339
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX. 1998
Dear Sirs:
Re: XXXXXXXXXX
We are writing in response to your correspondence of XXXXXXXXXX in which you had requested an advance income tax ruling on behalf of the above-referenced corporation. We also acknowledge your additional correspondence regarding this matter.
You have advised that, to the best of the knowledge of a senior officer XXXXXXXXXX none of the issues involved in this ruling request is included in a return of XXXXXXXXXX or a related person, is being considered by a tax services office or a taxation centre of Revenue Canada in connection with a previously filed tax return of XXXXXXXXXX or a related person, is under objection or appeal by XXXXXXXXXX or a related person, is before the courts or, if a judgement has been issued, the time limit for appeal has not expired or, is the subject of an earlier advance income tax ruling.
Hereinafter, XXXXXXXXXX is referred to as “ACO” in this advance income tax ruling.
FACTS
1. ACO was continued under the Canada Business Corporations Act in 1997.
2. ACO is a “taxable Canadian corporation” and a “public corporation” within the meaning of those terms in subsection 89(1) of the Income Tax Act (Canada) (the “Act”) and is resident in Canada for purposes of the Act. The shares of ACO are listed on XXXXXXXXXX.
3. ACO is a company involved directly and through its subsidiaries in the provision of XXXXXXXXXX in Canada. The corporate tax number of ACO is XXXXXXXXXX and it files its return of income with the XXXXXXXXXX tax services office of Revenue Canada.
PROPOSED TRANSACTIONS
4. ACO has entered into an acquisition agreement to purchase all of the shares of XXXXXXXXXX. (the “Acquisition”) for total consideration of Cdn. $XXXXXXXXXX. The Acquisition is expected to close on or about XXXXXXXXXX.
5. ACO intends to raise all or substantially all of the cash portion of the financing for the Acquisition in the high yield debt markets in the U.S. and Canada through the issuance of US $XXXXXXXXXX principal amount of Senior Notes Due XXXXXXXXXX (the “Notes”) with net proceeds, after payment of commissions and fees, of approximately Cdn. $XXXXXXXXXX. ACO’s financial advisors have indicated that in order to be certain that ACO will obtain financing for the Acquisition (which is a condition precedent to closing the Acquisition) and in order to achieve the most favourable rate on the Notes, ACO must be in a position to access the U.S. and Canadian markets by having the Notes issued at a time prior to the Acquisition closing. Nonetheless, as a commercial matter and from the Noteholders’ perspective, the funding is tied to the Acquisition. If the Acquisition were not to proceed, ACO would not own the significant asset (i.e., the shares of XXXXXXXXXX.) which is critical to the Noteholders’ willingness to lend to ACO on the terms and conditions set out in the Notes. Accordingly, and on this basis, the Notes are to be structured with the terms and conditions outlined below.
6. For commercial reasons relating to the potential bankruptcy or insolvency of ACO pending the Acquisition, the Notes will be issued by a special purpose wholly-owned subsidiary of ACO (“ACO Escrow Corp.”). Assuming the Acquisition is to close, immediately prior to closing the Acquisition, ACO Escrow Corp. will be wound-up into ACO and all of the assets of ACO Escrow Corp., including the proceeds of the Note offering, will be transferred to ACO and all of the liabilities of ACO Escrow Corp., including the Notes, will be assumed by ACO. (For ease of reference, the borrower under the Notes in the description of the Notes below is referred to herein as “ACO” despite the Notes being originally issued by ACO Escrow Corp.).
7. The Notes will be issued pursuant to a trust indenture (the “Indenture”) to be entered into between ACO and one or more trust companies.
8. The Notes will bear interest at a fixed rate to be determined. In the period prior to a date in XXXXXXXXXX to be determined, interest will accrue on the Notes, will not be payable in cash but will be deferred and paid out upon maturity or early redemption of the Notes. In the period from the relevant date in XXXXXXXXXX and until the maturity of the Notes or their early redemption, interest will be payable on the Notes in cash semi-annually.
9. The Notes will be unsecured obligations of ACO ranking pari passu in right of payment with all other existing and future senior Indebtedness (as defined in the indenture) of ACO and will rank senior in right of payment to all existing and future subordinated Indebtedness of ACO.
10. The Notes will not (except in the limited circumstances described in paragraphs 12 and 13, below) be redeemable at the option of ACO prior to a date which is five years from the date of issuance of the Notes. Thereafter, the Notes will be subject to redemption at the option of ACO, in whole or in part, at the stated redemption price plus accrued and unpaid interest to the date of redemption.
11. In the event that ACO is required to withhold or deduct any amount for, or on account of, taxes from any payment made under the Notes, ACO will pay such additional amounts (“Additional Amounts”) as may be necessary so that the net amount received by each holder (other than certain excepted holders) after such withholding or deduction will not be less than the amount the holder would have received if such taxes had not been withheld or deducted.
12. ACO may, at its option, redeem the Notes, as a whole but not in part, at a redemption price equal to 100% of the aggregate principal amount of the Notes, together with accrued and unpaid interest to the redemption date, if ACO has become or would become obligated to pay any Additional Amounts as a result of any change in the laws or regulations of Canada or any change regarding the application or interpretation of such laws or regulations, which is announced or becomes effective on or after the issue of the Notes. In addition, if prior to a date in XXXXXXXXXX to be determined, ACO receives cash proceeds from the sale of its Capital Stock (other than Disqualified Stock) in one or more Qualified Equity Offerings (which would include an equity investment in excess of $50 million by a Strategic Investor (as defined in the Indenture) but would not include the issuance of shares as consideration for the Acquisition described in paragraph 4, above, and would also include an underwritten offering of common stock by ACO registered under the Securities Act or qualified for distribution by prospectus under the securities laws of any province, ACO may, at its option, subject to certain limitations, use all or a portion of the net cash proceeds to redeem up to 25% of the aggregate principal amount of the Notes at a price based on the principal amount plus accrued and unpaid interest to the redemption date.
13. Upon the occurrence of a Change of Control (as defined in the Indenture) each holder of Notes will have the right to require ACO to repurchase all or any part of such holder’s Notes pursuant to a Change of Control Offer (as defined in the Indenture) at a purchase price equal to 101% of the aggregate principal amount of the Notes plus accrued and unpaid interest to the date of purchase. In addition, in the event the Acquisition does not close and upon the earlier to occur of (a) five business days after the termination of the Acquisition agreement between ACO and the shareholders of XXXXXXXXXX. in accordance with its terms and (b) XXXXXXXXXX (either a “Failed Acquisition”) ACO Escrow Corp. will be required to repurchase all of the Notes pursuant to a Special Mandatory Redemption (as defined in the Indenture) (such earlier date, the “Special Mandatory Redemption Date”) at a purchase price equal to 101% of the aggregate principal amount of the Notes plus accrued and unpaid interest to the date of purchase. Neither a Change of Control nor a Failed Acquisition will constitute an Event of Default (as defined) in the Indenture. Failure to comply with the provisions of the Change of Control Offer or the Special Mandatory Redemption will constitute an Event of Default (as defined) in the Indenture. In addition, ACO will have the option (the “Special Optional Redemption”) at any time prior to the Special Mandatory Redemption Date to redeem the Notes at a redemption price in cash equal to 101% of the aggregate principal amount of the Notes plus accrued and unpaid interest to the date of redemption by delivering to the Trustee an Officer’s Certificate stating that the Acquisition will not be consummated on or before XXXXXXXXXX.
14. ACO will be required to make an offer to purchase the Notes in certain circumstances relating to an Asset Sale or Sale and Leaseback (as defined in the Indenture). Specifically, within 360 days of a permitted Asset Sale or Sale and Leaseback, ACO (or a Restricted Subsidiary, as defined in the Indenture) may, at its option, reinvest the Net Cash Proceeds (as defined in the Indenture) from the Asset Sale or Sale and Leaseback in XXXXXXXXXX Assets or a XXXXXXXXXX Business, reduce secured Indebtedness or redeem preferred stock, repay outstanding Indebtedness under a revolving credit facility or reduce Indebtedness which is pari passu with the Notes and matures prior to XXXXXXXXXX. Any Net Cash Proceeds not used within 360 days as described above becomes Excess Proceeds (as defined in the Indenture) which, when it exceeds $XXXXXXXXXX in aggregate, requires ACO to make an offer to purchase the Notes at a price equal to 100% of the principal amount plus accrued and unpaid interest to the purchase date.
Other than in the circumstances described above and those in paragraphs 12 and 13, above, and pursuant to an Event of Default (as defined in the Indenture) ACO will not be obliged to repay the indebtedness evidenced by the Notes within five years from the date of issuance of the Notes.
15. Pending the Acquisition, ACO Escrow Corp. must place the proceeds from the offering of the Notes into escrow with a third party trustee. ACO may be required to contribute a certain amount of additional capital to ACO Escrow Corp. to be placed in escrow and possibly to place certain additional amounts into escrow with a third party trustee which amounts on escrow by ACO Escrow Corp. and ACO, in the aggregate, would equal the maximum amount payable to the Noteholders pursuant to a Special Mandatory Redemption. The type of investments which may be made with such escrowed funds will be restricted, pursuant to an escrow agreement, to Canadian and/or U.S. government debt. None of the escrowed funds will be subject to a pledge in favour of the Noteholders. The escrowed funds will be released from escrow on the earlier to occur of (a) the date the Acquisition is closed, to satisfy XXXXXXXXXX the purchase price; or (b) the date of a Special Mandatory Redemption whereupon the funds shall be paid to the Noteholders pursuant to a Special Mandatory Redemption.
16. ACO is in the process of preparing for mailing in XXXXXXXXXX, a preliminary offering memorandum concerning the offering in the U.S. and Canada of the Notes.
PURPOSE OF PROPOSED TRANSACTION
ACO intends to use the proceeds from the issuance of the Notes to fund a portion of the purchase price for the Acquisition.
RULINGS PROVIDED
Provided that the preceding statements are accurate and complete and the proposed transactions are carried out as described above, the following rulings are provided:
A. The inclusion of the provision in the Indenture providing that the failure of ACO to comply with the Special Mandatory Redemption provision because of a Failed Acquisition constitutes an Event of Default under the Indenture will not, in and of itself, preclude the application of the exemption from withholding tax in subparagraph 212(1)(b)(vii) of the Act in respect of interest paid by ACO to holders of the Notes who, for purposes of the Act, are non-residents of Canada who deal at arm’s length with ACO.
B. The exemption from withholding tax in subparagraph 212(1)(b)(vii) of the Act will not be denied in respect of interest paid by ACO to holders of the Notes who, for purposes of the Act, are non-residents of Canada who deal at arm’s length with ACO solely by virtue of the obligations of ACO and ACO Escrow Corp. to deposit the proceeds of the Notes in escrow as described in paragraph 15 of the Proposed Transactions.
These rulings are provided subject to the limitations and qualifications set out in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and are binding upon the Department provided that the proposed transactions are completed on or before XXXXXXXXXX. These rulings are based upon the Act and the Income Tax Regulations in their present form and do not take into account the effects of any proposed amendments thereto.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1997
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1997
Email this Content