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:
Whether paragraph 18(9.1)(d) of the Act would apply when a bond is purchased in the open market by the issuing company in the manner in which open market purchases are normally made by the general public at a price which exceeds the greater of the principal amount of the obligation and the amount for which it was issued by the taxpayer (the "Excess").
Position TAKEN:
No
Reasons FOR POSITION TAKEN:
A premium paid for a bond purchased on the open market in the normal manner would, generally, not constitute a penalty or bonus payable because of the repayment of a debt obligation before its maturity, regardless of the identity of the purchaser.
XXXXXXXXXX 2000-003682
P. Diguer CGA
Attention: XXXXXXXXXX
September 13, 2000
Dear Sir:
Re: Repurchase of Debentures on the Open Market
This is in reply to your facsimile dated July 11, 2000 in which you request the Canada Customs & Revenue Agency's (the "Agency") views on the tax consequences to a taxable Canadian corporation of a purchase, by it, of its debentures on the open market.
Specifically, in your letter you describe a situation where a taxable Canadian corporation (the "Issuer") has issued bonds (the "Bonds") which trade on the open market. The proceeds from the issue of the Bonds are used by the Issuer for the purpose of gaining or producing income from a business. The issuer purchases the Bonds on the open market in the manner in which open market purchases are normally made by the general public at a price which exceeds (the "Premium") the face amount. There is no accrued interest payable in respect of the Bonds at the time of the purchase. It is understood that, in respect of the Bonds, the Issuer does not exercise advantages or special rights not available to the general public.
In particular you ask:
1 Would paragraph 18(9.1)(d) of the Income Tax Act (Canada) (the "Act") apply to the Premium paid by the Issuer in the situation described above?
2. Does the Agency agree with your view that subsection 39(3) would not apply to any portion of the Premium to which paragraphs 18(9.1)(e) and 18(9.1)(f) would apply. This is based on that portion of subsection 39(3) following paragraph 39(3)(b).?
3. Does the Agency agree with your view that subsection 39(3) would apply to that portion of the Premium to which paragraphs 18(9.1)(e) and 18(9.1)(f) do not apply.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R3 dated December 30, 1996. Nevertheless, we offer the following general comments in connection with your request which we hope are of assistance to you.
Subsection 18(9.1) provides, in part, as follows:
(9.1)
Subject to subsection 142.4(10), where at any time a payment ...
...
...is made to a person ... by a taxpayer in the course of carrying on a business ... in respect of borrowed money ... (in this subsection referred to as a "debt obligation")
...
(d) as a penalty or bonus payable by the taxpayer because of the repayment by the taxpayer of all or part of the principal amount of the debt obligation before its maturity,
the payment shall, to the extent that it may reasonably be considered to relate to, and does not exceed the value at that time of, an amount that, but for ... the repayment described in paragraph (d), would have been paid or payable by the taxpayer as interest on the debt obligation for a taxation year of the taxpayer ending after that time, be deemed,
...
(f) for the purpose of computing the taxpayer's income in respect of the business ... for the year, to have been paid or payable by the taxpayer in that year as interest pursuant to a legal obligation to pay interest, ....
(emphasis added is ours)
In a situation where an issuer is purchasing it bonds on the open market in the manner in which open market purchases are normally made by the general public rather than dealing with the bondholder, we have difficulty viewing any part of the purchase price as being in part a penalty or bonus.
Thus the Premium paid by the Issuer in the situation described in your letter would generally not be considered a penalty or bonus payable by the taxpayer because of the repayment of a debt obligation before its maturity such that subsection 18(9.1) would not apply in this situation.
Generally, when bonds are purchased in the open market by the issuing company in the manner in which open market purchases are normally made by the general public at a price which exceeds the greater of the principal amount of the obligation and the amount for which it was issued by the taxpayer, the excess amount would be deemed by virtue of paragraph 39(3)(b) of the Act, to be a capital loss of the taxpayer for the taxation year from the disposition of a capital property.
We trust that our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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