Principal Issues: Whether a Note is a "prescribed debt obligation" in accordance with Regulation 7000(1)(d) and for purposes of subsection 12(9) and thus subsection 12(4), or is only subject to paragraph 12(1)(c) when paid at maturity.
Position: A prescribed debt obligation but it cannot be calculated until maturity thus it is only subject to paragraph 12(1)(c)
Reasons: Prior Position - everything is determined on the maturity date.
XXXXXXXXXX 2007-023735
XXXXXXXXXX , 2007
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX ("A Co") BN XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, wherein you request an advance income tax ruling on behalf of the above-named taxpayer.
We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues contained in this ruling request herein are:
(i) dealt with in an earlier return of A Co or a related person;
(ii) being considered by a tax services office or a taxation centre in connection with a tax return already filed by A Co or a related person;
(iii) under objection by A Co or a related person;
(iv) the subject of a previous ruling issued by the Income Tax Rulings Directorate to A Co or a related person; nor
(v) before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired.
The XXXXXXXXXX Taxation Centre is responsible for managing and processing the tax returns filed by A Co. Unless otherwise stated, all statutory references in this application are references to the provisions of the Act and all terms used herein that are defined in the Act have the respective meanings given in such definitions.
DEFINITIONS
In this letter, the following terms have the meanings specified:
(a) "A Co" means XXXXXXXXXX;
(b) "Act" means the Income Tax Act (Canada) R.S.C. 1985 (5th Supp.), c.l, as amended to the date of this letter;
(c) "B Co" means XXXXXXXXXX;
(d) "CRA" means the Canada Revenue Agency;
(e) "Distribution" means an actual distribution on a Share such that the net effect to holders of Shares is that they receive cash or additional Shares;
(f) "Extraordinary Event" has the meaning referred to in 9 below;
(g) "Final Value" means, in respect of Shares of an Issuer, the quotient obtained by dividing (i) the value of the Shares of the Issuer in the Share Portfolio on the Final Valuation Date less accrued but unpaid fees payable to A Co under the Note program that are applicable to such Shares at such time by (ii) the number of Notes outstanding on the Final Valuation Date;
(h) "Final Valuation Date" means the date (XXXXXXXXXX ) on which the Total Share Returns are determined for the purposes of computing the Variable Return, if any;
(i) "Initial Value" means, in respect of Shares of an Issuer, the quotient obtained by dividing (i) the value of the Shares of the Issuer in the Share Portfolio on the Issue Date by (ii) the number of Notes outstanding on the Issue Date, for greater certainty, being $XXXXXXXXXX;
(j) "Issue Date" means on or about XXXXXXXXXX;
(k) "Issuer" means an issuer, the common shares or units (as applicable) of which are notionally held from time to time in the Share Portfolio, and "Issuers" means, collectively, all Issuers;
(l) "Maturity Date" means on or about XXXXXXXXXX;
(m) "Note" and "Notes" have the meanings referred to in 3 below;
(n) "Noteholder" has the meaning referred to in 5 below;
(o) "Principal Amount" has the meaning referred to in 4 below;
(p) "Proposed Transactions" means the transactions referred to in 3 to 11 below;
(q) "Share" means, from time to time, a common share or unit, as the case may be, of an Issuer included in the Share Portfolio and "Shares" means, collectively, all Shares in the Share Portfolio or all Shares of an Issuer in the Share Portfolio, as the context may require;
(r) "Share Portfolio" has the meaning referred to in 7 below;
(s) "Total Share Return" has the meaning referred to in 8 below;
(t) "Variable Return" has the meaning referred to in 9 below;
(u) "Variable Return Early Payment Amount" has the meaning referred to in 9 below; and
(v) "Variable Return Early Payment Date" has the meaning referred to in 9 below.
Facts:
1. A Co is a XXXXXXXXXX taxable Canadian corporation.
2. B Co is an indirect wholly-owned subsidiary of A Co, XXXXXXXXXX and a taxable Canadian corporation.
Proposed Transactions:
3. A Co proposes to issue up to a maximum of $XXXXXXXXXX of XXXXXXXXXX notes (individually a "Note" and collectively the "Notes") to one or more retail and/or institutional investors. The Notes will be issued pursuant to an Information Statement ("Information Statement"). The material attributes of the Notes are summarized below.
4. Each Note will be denominated in Canadian dollars and issued for an amount equal to its principal amount of $XXXXXXXXXX (the "Principal Amount").
5. A holder of a Note (a "Noteholder") will not be entitled to any payment under a Note prior to the Maturity Date except as provided in 9 below.
6. On the Maturity Date, a Noteholder will be entitled to repayment of the Principal Amount together with a return ("Variable Return"), if any, based on the performance, as determined on the Final Valuation Date, of a notional portfolio of Shares (the "Share Portfolio") initially comprised of Shares of XXXXXXXXXX Issuers in equal proportions.
7. Variable Return, if any, on a Note is determined by multiplying the Principal Amount by the greater of zero and the simple average of the Total Share Returns for the Shares of each of the Issuers in the Share Portfolio as determined on the Final Valuation Date.
8. The "Total Share Return" for the Shares of an Issuer on the Final Valuation Date is the percentage calculated as follows:
Final Value - Initial Value
Initial Value
provided that the Total Share Return for the Shares of an Issuer on the Final Valuation Date may not exceed XXXXXXXXXX%. The Final Value of Shares of an Issuer reflects (a) deductions of fees XXXXXXXXXX under the Note program that are applicable to such Shares, and (b) the application of Distributions on such Shares to notionally purchase additional Shares.
9. In the case of certain events (each an "Extraordinary Event") specified in the Information Statement, XXXXXXXXXX, A Co may, at its option, (a) replace the applicable Shares in the Share Portfolio with notional common shares and/or units of another Issuer, or (b) on notice to each Noteholder, have B Co, as calculation agent under the Note program, estimate the amount ("Variable Return Early Payment Amount"), if any, of the present value of the right of a Noteholder to receive (but for the occurrence of the Extraordinary Event) Variable Return, if any. XXXXXXXXXX In no circumstances will a Noteholder be entitled to receive the Principal Amount prior to the Maturity Date.
10. Variable Return will be uncertain prior to the Final Valuation Date and may be nil.
11. XXXXXXXXXX.
Purpose of the Proposed Transactions:
12. The purpose of the Proposed Transactions is to permit (a) A Co to procure funds for use in its XXXXXXXXXX business by issuing Notes, XXXXXXXXXX.
RULINGS
Provided the preceding statements constitute complete and accurate disclosure of all relevant facts, the Proposed Transactions and purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, and provided the Noteholder holds the Notes to maturity and receives the Variable Return as calculated in 7 and 8 above from A Co, or the Noteholder receives the Variable Return Early Payment Amount, if any, as calculated in 9 above from A Co, we rule as follows:
A. Provided that a Variable Return Early Payment Amount, if any, does not become payable in the year of issuance of a Note, the Note is a prescribed debt obligation described in paragraph 7000(1)(d) of the Regulations.
B. Provided that a Variable Return Early Payment Amount, if any, does not become payable prior to the year in which the Final Valuation Date occurs, no amount will be required to be included under subsection 12(4) of the Act in the income of a Noteholder who is an individual for any taxation year.
C. A Variable Return Early Payment Amount, if any, as described in 9 above, that is payable and paid in the same taxation year will be included in the income of a Noteholder in that particular taxation year under paragraph 12(1)(c) of the Act.
D. Provided a Noteholder holds a Note on the Maturity Date, the Variable Return, if any, will be required to be included under paragraph 12(1)(c) of the Act in the income of such Noteholder for the taxation year in which the Maturity Date occurs.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX.
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
COMMENTS
The above advance income tax rulings do not apply to the Noteholder in the event, the Noteholder disposes of the Notes prior to the Maturity Date.
Nothing in this ruling should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of the fair market value of any property or any shares referred to herein.
Yours truly,
XXXXXXXXXX
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
