Expansion of permitted security rights under s. 18(5) - "specified right"(p. 362)
Second…[t]he revised ''specified right'' definition appears to have been improved in two ways, both of which in general seem to accommodate normal course secured guarantees and similar security arrangements typically found in commercial lending agreements. First, the party holding the security can pledge the secured property to secure the repayment of other debts, as is sometimes provided for in secured property legislation and some derivatives agreements….
Second, earlier versions of the ''specified right'' definition seemed to cause an event of default under the Canco debt (which typically gives a Creditor Party the immediate right to sell the secured property) to itself result in a specified right,…[whereas] the revised definition seems to prevent this if it can be shown that the Creditor Party must use any sale proceeds from the secured property to repay the Canco debt (or certain related debts)….
Introduction of requirement for strong causal connection (p. 361)
Two aspects of the revised secondary obligation definition merit further comment. First, both the Creditor Party [intermediary] debt and Creditor Party [specified] right elements of the revised definition now use the term ''because'' to delineate what causes a secondary obligation [intermediary debt] to exist. This represents a significantly higher standard than was the case under the August 29 version of the term, and the concept appears to have been imported from another ''indirect loan'' rule in the ITA [in s. 17(2)].
[I]n AG of Canada v. Hoefele ... [fn 15: 95 DTC 5602 (FCA)…] the Federal Court of Appeal interpreted the ''because'' standard as implying a ''strong causal connection''… .
Introduction of requirement for strong causal connection (p. 361)
Two aspects of the revised secondary obligation definition merit further comment. First, both the Creditor Party [intermediary] debt and Creditor Party [specified] right elements of the revised definition now use the term ''because'' to delineate what causes a secondary obligation [intermediary debt] to exist. This represents a significantly higher standard than was the case under the August 29 version of the term, and the concept appears to have been imported from another ''indirect loan'' rule in the ITA [in s. 17(2)].
[I]n AG of Canada v. Hoefele ... [fn 15: 95 DTC 5602 (FCA)…] the Federal Court of Appeal interpreted the ''because'' standard as implying a ''strong causal connection''… .
Expansion of permitted security rights under s. 18(5) - "specified right"(p. 362)
Second…[t]he revised ''specified right'' definition appears to have been improved in two ways, both of which in general seem to accommodate normal course secured guarantees and similar security arrangements typically found in commercial lending agreements. First, the party holding the security can pledge the secured property to secure the repayment of other debts, as is sometimes provided for in secured property legislation and some derivatives agreements….
Second, earlier versions of the ''specified right'' definition seemed to cause an event of default under the Canco debt (which typically gives a Creditor Party the immediate right to sell the secured property) to itself result in a specified right,…[whereas] the revised definition seems to prevent this if it can be shown that the Creditor Party must use any sale proceeds from the secured property to repay the Canco debt (or certain related debts)….
Narrow 25% safe harbour (p. 363)
There are two basic scenarios in which the de minimis exception is intended to provide relief. The first is when the amount of any secondary obligations in respect of the Canco debt is relatively small so as to be less than 25 percent of the Canco debt….
The second situation is when the Canco debt is one of a number of debts owing by a group of related debtors to the same creditor, and the same secondary obligations that secure the Canco debt also secure the other debts owing by those group members….
[F]or other group debts to be included within item B [i.e., s. 18(6)(d)(i) and (ii), or 212(3.1)(e)(i) and (ii)], above:
- the creditor must be Creditor itself, rather than any Creditor Party;
- the security interests relating to the various debts and the Canco debt must correspond quite closely; and
- the other group debts must arise under the agreement creating the Canco debt or an agreement that is ''connected'' to that agreement.
It is not obvious why such a high degree of interconnectivity between the Canco debt and other Canco Party debts is necessary to include the latter in the denominator for purposes of the de minimis exception….
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