Joint Committee recommends that standby charges, consent fees and early consent bonuses paid to lenders be deemed to be Part XIII-exempt interest in light of Pangaea

The Joint Committee has recommended, in light of the broad textual approach taken in Pangaea as to what is a “restrictive covenant,” that the Act (perhaps s. 214(15)) be amended to treat payments of the following types of payments as payments of non-participating interest on the underlying debt, so that they would be more clearly exempt from Part XIII withholding:

• fees and charges (e.g., standby charges) payable by a borrower as consideration for the lender agreeing to lend money or make money available (arguably, under the definition of “restrictive covenant” such an agreement “affects … the … provision of property … by the taxpayer” (i.e., of funds by the lender) or “affects … the acquisition of property … by the taxpayer” (i.e., the lender’s acquisition of the debt obligation))
• consent payments to creditors, e.g., to permit a particular transaction or loosen a financial covenant (such “agreement could be viewed as affecting the (ongoing) provision of property by the taxpayer, being the loaned funds, especially if the consent relates to an amendment of a covenant that could otherwise have been breached and allowed … acceleration …”)
• in the context of a distress restructuring, an additional payment made to a debt holder who agrees to exchange for the securities of the restructured debtor by a specified date, e.g., the receipt of additional shares on a debt for shares restructuring (the additional shares “may properly be viewed as consideration for the debenture holder having agreed to consent to the restructuring plan by the specified date, rather than as consideration for the exchange itself, having regard to paragraph 68(c).”)

Neal Armstrong. Summary of “Impact of Pangaea Case,” 10 August 2020 Joint Committee Submission under s. 212(1)(i).