2000 Ruling 2000-0035043 - XXXXXXXXXX

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. Deductibility of fee paid to parent corporation for parent issuing warrants to purchasers of debt of subsidiary. Warrants allow debtholder to exchange debt for shares of parent.

2. Deductibility of interest on funds used to return capital.

Position:

1. OK
2. OK

Reasons:

1. XXXXXXXXXX prior ruling (file # 972815) re: identical transaction (transaction was not completed).

2. Borrowed funds will not exceed capital to be returned.

XXXXXXXXXX 							2000-003504

Attention: XXXXXXXXXX

XXXXXXXXXX , 2000

Dear Sirs:

Re: XXXXXXXXXX

We are writing in response to your correspondence of XXXXXXXXXX wherein you had requested an advance income tax ruling on behalf of XXXXXXXXXX.

You have advised that, to the best of the knowledge of yourself and that of responsible officials of XXXXXXXXXX, none of the issues involved in this advance income tax ruling request are involved in an income tax return of XXXXXXXXXX, have been considered by a Taxation Services Office or Taxation Centre of Canada Customs and Revenue Agency, or are the subject of an objection or appeal.

In this advance income tax ruling:

XXXXXXXXXX is referred to as "ACO";

XXXXXXXXXX is referred to as "BCO";

XXXXXXXXXX is referred to as "CCO"; and

XXXXXXXXXX is referred to as "DCO".

STATEMENT OF FACTS

1. ACO is a company amalgamated under the Business Corporations Act, XXXXXXXXXX. The principal business of ACO is XXXXXXXXXX in Canada. ACO files its T2 Corporation Income Tax Returns with the XXXXXXXXXX Taxation Centre. The business number of ACO is XXXXXXXXXX.

2. ACO is a public corporation and a taxable Canadian corporation within the meanings assigned by subsection 89(1) of the Income Tax Act (the "Act").

3.

XXXXXXXXXX

The term paid-up capital ("PUC") has the meaning assigned by subsection 89(1) of the Act.

The proceeds from the issuance of the XXXXXXXXXX shares 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 (or deemed by subsection 20(3) of the Act to be payable for such purpose).

As at XXXXXXXXXX shares of ACO were issued and outstanding. CCO owns all of the shares of ACO other than XXXXXXXXXX exchangeable shares which are owned by the general public.

4. The unaudited financial statements of ACO as at XXXXXXXXXX , to be filed with its XXXXXXXXXX T2 Corporation Income Tax Return, report an accumulated deficit of approximately Cdn$XXXXXXXXXX.

5. CCO, a XXXXXXXXXX unlimited liability corporation, was incorporated under the Companies Act (XXXXXXXXXX). CCO filed its XXXXXXXXXX T2 Corporation Income Tax Returns with the XXXXXXXXXX Taxation Centre and its business number is XXXXXXXXXX.

XXXXXXXXXX.

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

6. DCO is a corporation formed under the laws of XXXXXXXXXX, and resident in the United States. Its head office is at XXXXXXXXXX DCO is a non-resident of Canada for the purposes of the Act. DCO is an XXXXXXXXXX company which, XXXXXXXXXX.

7. The authorized share capital of DCO consists of XXXXXXXXXX shares of common stock. The issued share capital of DCO outstanding as at XXXXXXXXXX consists of XXXXXXXXXX common shares, all of which are owned by BCO.

8. BCO is a corporation formed under the laws of XXXXXXXXXX, and resident in the United States. The head office of BCO is at XXXXXXXXXX. BCO is a non-resident of Canada for the purposes of the Act.

9. The authorized share capital of BCO consists of XXXXXXXXXX common shares, XXXXXXXXXX preferred shares and XXXXXXXXXX voting stock. As at XXXXXXXXXX, the issued share capital of BCO consists of approximately XXXXXXXXXX outstanding common shares. No preferred shares were issued as at XXXXXXXXXX. There is XXXXXXXXXX voting share of BCO issued which is held in trust for the holders of the exchangeable shares of ACO. The common shares of BCO are listed for trading on the XXXXXXXXXX.

10. ACO has previously borrowed amounts for the purpose of earning income from business or property or which amounts are deemed by subsection 20(3) of the Act to have been borrowed for such purpose. Also, ACO has amounts payable for property which was acquired for the purpose of earning income from business or property or which amounts are deemed by subsection 20(3) of the Act to be payable for such purpose.

11. To the knowledge of the management and directors of BCO, no one person or related group of persons owns or controls shares of BCO carrying more than 15% of the votes attaching to all of the shares of BCO that are outstanding. The common shares outstanding of BCO are widely held by the general public.

12. 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

13. ACO proposes to offer for sale units (the "Units") which represent the following obligations of ACO and BCO:

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

b) a guarantee (a "Guarantee") granted by BCO 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 BCO to a Holder (evidenced by a "Warrant") to exchange the above-mentioned debt obligation for common stock of BCO ("BCO Stock").

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

14. 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 $XXXXXXXXXX.

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

The Bonds and the Guarantees (see subparagraph 18(a) below) will be issued under an indenture (the "Indenture") among ACO, BCO and a trustee (the "Trustee").

16. The Units, which will be designated as eligible for trading in the Private Offering, Resales and Trading through Automatic Linkages ("PORTAL") market, will be offered in registered and bearer form. Initially, the Bonds shall be in global form and be registered in the name of a clearing agency registered under the United States Securities Exchange Act of 1934, as amended, or a nominee thereof. Unless and until they are exchanged in whole or in part for Bonds in definitive registered form, the Bonds in global form may not be transferred except as a whole between the clearing agency and a nominee thereof. The initial placement and initial resale of the Units and the BCO 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 BCO for the benefit of the Holders.

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

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

c) 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. To the extent that payment of such interest shall be legally enforceable, interest on any overdue Principal Amount and on any overdue Interest will accrue at a specified annual interest rate.

d) ACO or BCO 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, guarantee and exchange right 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) 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) The Units will be redeemable by ACO in whole or in part at any time after the XXXXXXXXXX anniversary of the Issue Date of the Units, and in whole but not in part at any time in the event of certain changes in United States or Canadian taxation. At such times, the Units will be redeemable at the option of ACO at a redemption price (the "Redemption Price") equal to their Principal Amount plus the amount of Interest that has accrued as of the Redemption Date. Upon the redemption of the Units, the related Warrants will automatically expire.

To redeem Units, ACO will be required to notify the Trustee in writing, at least 60 days prior to the Redemption Date fixed by ACO (unless a shorter notice shall be satisfactory to the Trustee), of such Redemption Date and the Principal Amount of Units to be redeemed. If less than all of the Units are to be redeemed, the Trustee shall select the Units to be redeemed pro rata.

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) If a Fundamental Change of Control (as defined below) of BCO 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 XXXXXXXXXX days after the date ACO gives notice of the Fundamental Change of Control at a price (the "Repurchase Price") equal to XXXXXXXXXX % of their Principal Amount plus accrued Interest to the Repurchase Date, after which the related Warrants will automatically expire.

Prior to the mailing of a notice to Holders, but in any event within XXXXXXXXXX days following any Fundamental Change of Control, ACO covenants either to

i) pay in full or cause to be paid in full certain senior indebtedness of ACO; or

ii) obtain the requisite consent under such senior indebtedness to permit the repurchase of the Units, before repurchasing any Units.

Any failure to comply with such covenant shall constitute a default with respect to a covenant for purposes of determining Events of Default (as described in subparagraph (h), below).

On or before the thirtieth day after the occurrence of a Fundamental Change of Control, ACO is obligated to give notice to each Holder of Units of the occurrence of such Fundamental Change, the date by which the repurchase right must be exercised, the Repurchase Price and the procedures which the Holder must follow to exercise the right. To exercise the repurchase right, the Holder of the Unit must deliver, on or before the fifth 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 from whom a Repurchase Notice has been received.

For the purpose of the Fundamental Change of Control covenant, a Fundamental Change of Control means the occurrence of any transaction or event with which all or substantially all of the issued and outstanding common stock of BCO shall be exchanged for, converted into, acquired for or constitute solely the right to receive consideration (whether by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination reclassification, recapitalization or otherwise) which is not all or substantially all common stock or shares which are (or, upon consummation of or immediately following such transaction or event, will be) listed on a United States national securities exchange or approved for quotation on the Nasdaq National Market or any similar United States system of automated dissemination of quotations of securities prices.

h) Under the Indenture, 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 BCO to comply with any of its agreements under the Indenture or the Guarantee (other than those referred to above in clause (i), above) and the continuation of such failure for sixty 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 BCO in excess of $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 BCO.

The Indenture will provide that if an Event of Default occurs and is continuing, the Trustee, or the Holders of at least XXXXXXXXXX% in aggregate Stated Amount at Maturity of the outstanding Units at the relevant time, by notice in writing to ACO or BCO (and to the Trustee if given by the Holders) may declare the Principal Amount plus accrued Interest to the date of declaration to be immediately due and payable.

i) The debt obligations under the Units will be unsecured obligations of ACO, and will be subordinate to all present and future senior indebtedness of ACO and BCO. Where certain events occur, including ACO or BCO's insolvency, liquidation, winding-up or a similar event, Holders of Units will be required to pay to the holders of ACO and BCO's senior indebtedness any amounts received by such Holders in respect of the Units from ACO.

18. The rights and obligations of BCO under the Units are summarized below:

a) 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 BCO. The guarantee by BCO will be subordinate to all present and future unsubordinated indebtedness of BCO.

b) The expiration date ("Expiration Date") of the exchange rights evidenced by Warrants (the "Exchange Rights") will be the XXXXXXXXXX anniversary of the Issue Date, unless the maturity of related Units is accelerated, or the related Units are redeemed at the option of ACO or repurchased by ACO at the option of the Holders, in which case such Warrants may expire at such designated times. The number of shares of BCO Stock for which each Exchange Right is exercisable will be based on an exercise price (the "Exercise Price") for the BCO 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% to XXXXXXXXXX% of the market price (on the XXXXXXXXXX Stock Exchange) of the BCO Stock (expressed in United States dollars) on the date on which the offering of the Units is priced. As sole consideration for BCO Stock to be acquired on the exercise of the Exchange Right, the Holder will be required to surrender the Unit to BCO. ACO will then deliver to BCO a new certificate in definitive form representing the Principal Amount of Bonds to be delivered in payment of the Exercise Price of the Warrants.

Fractional BCO 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 BCO 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 BCO representing any Interest on the surrendered Unit accruing since the preceding semi-annual interest payment date. The BCO 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 BCO's obligation to pay for the Unit surrendered by the Holder.

The obligation to issue BCO Stock on the exercise of the Exchange Right by a Holder is solely that of BCO. Except in the event of an Event of Default (as defined above) or a Fundamental Change of 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.

19. ACO will be required to pay an underwriter's fee related to the issuance of the units.

20. ACO will pay a fee to BCO in the approximate amount of $XXXXXXXXXX (the "Payment") in respect of the provision of the Exchange Rights (evidenced by the Warrants) by BCO to the Holders.

21. 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).

PURPOSE OF THE PROPOSED TRANSACTIONS

The Units will be issued to raise funds necessary to meet ACO's business requirements and/or to refinance existing capital sources of ACO. More specifically, ACO will use the proceeds from the issuance of Units:

a) to pay the fee, as described in paragraph 20 of the Proposed Transactions, to BCO;

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

c) for the purpose of returning capital on its XXXXXXXXXX Shares outstanding.

d) to repay amounts previously borrowed by ACO 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); or

e) to repay amounts payable by ACO 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).

Rulings Provided

Provided that the above statements of fact are complete and accurate and that the proposed transactions are carried out as described, 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, within the meaning of that term in subsection 248(1) of the Act, and no portion of such issue proceeds will be separately allocated to the Warrant, as described in subparagraph 13(c) of the Proposed Transactions.

B. The amount of the Payment, as described in paragraph 20 of the Proposed Transactions, will be deductible by ACO in accordance with the provisions of subparagraph 20(1)(e)(ii) of the Act to the extent that such amount is reasonable in the circumstances.

C. The amount of the underwriter's fee incurred in connection with the issuance of the Units will be deductible by ACO in accordance with the provisions of subparagraph 20(1)(e)(ii) of the Act to the extent that such amount is reasonable in the circumstances.

D. ACO will be entitled to deduct pursuant to paragraph 20(1)(c) of the Act in computing its income for a taxation year interest paid or payable in respect of that year on that portion of the funds borrowed pursuant to the Bond, as described in subparagraph 13(a) of the Proposed Transactions, which is used by ACO to pay the Payment to the extent that both the Payment and the interest are reasonable in the circumstances.

E. None of subsections 15(1), 56(2) or 246(1) of the Act will be applicable to ACO solely by virtue of the payment of the Payment to BCO for the exchange right evidenced by the Warrant to the extent that the Payment is reasonable in the circumstances.

F. For the purpose of Part XIII of the Act, the Payment will not be considered to be either a standby charge or guarantee fee as contemplated by subsection 214(15) of the Act.

G. Provided that the stated capital of the XXXXXXXXXX shares of ACO immediately prior to the reduction of the stated capital of those shares is equal to or greater than the amount paid by ACO on the reduction of the stated capital of those shares, the interest paid or payable in respect of a taxation year on that portion of funds borrowed pursuant to the Bond, as described in subparagraph 13(a) of the Proposed Transactions, which is used to make such payment will be deductible in that taxation year by ACO pursuant to paragraph 20(1)(c) of the Act to the extent that such interest is reasonable in the circumstances.

H. Provided that the stated capital of the XXXXXXXXXX shares of ACO immediately prior to the reduction of the stated capital of those shares is equal to or greater than the amount paid by ACO on the reduction of the stated capital of those shares, the interest paid or payable in respect of a taxation year on that portion of funds borrowed pursuant to the Bond, as described in subparagraph 13(a) of the Proposed Transactions, which is used to make such payment will be deductible in that taxation year by ACO pursuant to paragraph 20(1)(c) of the Act to the extent that such interest is reasonable in the circumstances.

I. Provided that the stated capital of the XXXXXXXXXX Shares of ACO immediately prior to the reduction of the stated capital of those shares is equal to or greater than the amount paid by ACO on the reduction of the stated capital of those shares, the interest paid or payable in respect of a taxation year on that portion of funds borrowed pursuant to the Bond, as described in subparagraph 13(a) of the Proposed Transactions, which is used to make such payment will be deductible in that taxation year by ACO pursuant to paragraph 20(1)(c) of the Act to the extent that such interest is reasonable in the circumstances.

J. Provided that ACO is entitled to a deduction pursuant to paragraph 20(1)(c) of the Act in respect of interest paid or payable on amounts previously borrowed or amounts payable for property acquired for the purpose of earning income from business or property, or deemed by subsection 20(3) of the Act to be so used, ACO will be entitled to deduct for a taxation year pursuant to subsection 20(3) and paragraph 20(1)(c) of the Act the interest paid or payable on such portion of the funds borrowed pursuant to the Bond, as described in subparagraph 13(a) of the Proposed Transactions, which is used by ACO to repay such amounts and which is in respect of that taxation year to the extent that such interest is reasonable in the circumstances.

K. Interest paid by ACO in respect of the Bond, as described in subparagraph 13(a) of the Proposed Transactions, to a Holder, as described in subparagraph 13(b) of the Proposed Transactions, who is a non-resident of Canada will be exempt from the provisions of paragraph 212(1)(b) of the Act by virtue of subparagraph 212(1)(b)(vii) thereof to the extent that such Holder deals at arm's length with ACO.

L. The provisions of subsection 245(2) of the Act will not be applicable as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences confirmed in the rulings provided herein.

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 Agency provided that the proposed transactions are completed on or before XXXXXXXXXX. The rulings are based on the Act and the Income Tax Regulations in their present form and do not take into account the effects of any proposed amendments thereto.

Nothing in this Ruling should be construed as implying that the Agency has agreed to or has reviewed either the reasonableness of the Payment described in paragraph 20 of the Proposed Transactions or the determination of the stated capital of any of the XXXXXXXXXX shares of ACO.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch