24 April 2001 Internal T.I. 2000-0037677 F - DEBENTURES CONVERTIBLES

2000-0046367 F has virtually identical taxpayer submissions and CRA comments. See also 2001-0081837 F.

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20(1)(f)(ii)

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Translation disclaimer

This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

ACCESS TO INFORMATION

Principal Issues: [TaxInterpretations translation]

When the issuer converts convertible debentures into shares without par value, does paragraph 20(1)(f) of the Act apply to allow the issuer to deduct the amount by which the FMV of the shares issued exceeds the amount for which the security was issued?

Position:

No.

Reason:

Under the terms of the trust deed, the conversion price is equal to the face amount of the debt and represents the stated capital of the shares issued.

                                                April 24, 2001

XXXXXXXXXX Tax Services Office                  Headquarters
                                                Financial Industries Division 
Attention: XXXXXXXXXX                     
                                                L. J. Roy, CGA

2000-003767

Convertible Debentures - XXXXXXXXXX

This is further to your memo of September 8, 2000 in which you requested our opinion with respect to the application of subparagraph 20(1)(f)(ii) of the Income Tax Act (the "Act").

Our understanding of the facts relating to the situation you have referred to us is as follows.

FACTS

1. XXXXXXXXXX (the "Corporation") is a corporation governed by the Business Corporations Act, R.S.C. 1985, c. C-44 (the "BCA").

2. On XXXXXXXXXX, the Board of Directors approved by resolution the issuance of debentures. The resolution, signed on XXXXXXXXXX, read as follows:

XXXXXXXXXX.

3. Pursuant to a trust indenture signed on XXXXXXXXXX, Corporation issued $XXXXXXXXXX of convertible debentures. XXXXXXXXXX.

4. The debentures were convertible, at the option of the holders, into common shares of Corporation at any time prior to the close of business on the last business day preceding XXXXXXXXXX or, if called for redemption, the earlier of the date fixed for redemption. Subject to adjustments in certain circumstances, the conversion price was $XXXXXXXXXX per common share, representing a rate of approximately XXXXXXXXXX common shares per $XXXXXXXXXX. Following a 2-for-1 stock split, the conversion price became $XXXXXXXXXX, representing a rate of approximately XXXXXXXXXX common shares per $XXXXXXXXXX of debenture.

5. Subject to applicable securities laws, Corporation could purchase for cancellation the Debentures in the market by means of an identical offer to all holders of Debentures at prices not exceeding XXXXXXXXXX% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase and costs of purchase.

6. On XXXXXXXXXX, the closing price of the common shares was $XXXXXXXXXXX on the XXXXXXXXXX Stock Exchange.

7. The debentures were not redeemable prior to XXXXXXXXXX. Thereafter and prior to XXXXXXXXXX, they were redeemable at the option of Corporation only if the weighted average trading price of Corporation's common shares on the XXXXXXXXXX Exchange for the XXXXXXXXXX consecutive trading days ending not more than five business days prior to the date or notice of redemption was greater than $XXXXXXXXXX per share or XXXXXXXXXX% of the conversion price on that date. As from XXXXXXXXXX, the debentures were redeemable at the option of the Corporation at any time at par, with accrued interest.

8. All debentures ranked pari passu and rateably. They constituted direct unsecured obligations of the Corporation and ranked subordinate to all of its senior indebtedness.

9. The net proceeds of the debentures were invested in shares of XXXXXXXXXX. Interest on the debentures was deductible pursuant to paragraph 20(1)(c).

10. From XXXXXXXXXX, debentures totalling $XXXXXXXXXX were gradually converted into common shares of Corporation. From XXXXXXXXXX, debenture holders converted debentures with a book value of $XXXXXXXXXX. The balance of the debentures of $XXXXXXXXXX was redeemed during the XXXXXXXXXX fiscal period.

11. At the time of the conversions, the market price of the Corporation's common shares was between $XXXXXXXXXX and $XXXXXXXXXX per share.

12. Upon conversion of the debentures, XXXXXXXXXX common shares were issued. On this basis, the taxpayer's representative states that the fair market value ("FMV") of the debentures was $XXXXXXXXXX.

13. For accounting purposes, the share capital of the common shares was increased by an amount equal to the face value of the converted debentures and no other amount was recorded in respect of the debentures. In addition, in Note XXXXXXXXXX to the XXXXXXXXXX financial statements, the fair value of the convertible debentures as at XXXXXXXXXX. That fair value was based on future cash flows discounted at the interest rate then prevailing on the market for debt with the same maturity.

14. The shares were issued in payment of the principal of the debentures and not as a payment of interest.

15. XXXXXXXXXX.

16. Corporation claimed an additional deduction of XXXXXXXXXX pursuant to subparagraph 20(1)(f)(ii).

17. Corporation requested a loss carryback from XXXXXXXXXX to XXXXXXXXXX in the amount of $XXXXXXXXXX. It is also requesting a further loss carryback from the XXXXXXXXXX year to the XXXXXXXXXX years in the amounts of $XXXXXXXXXX and $XXXXXXXXXX.

Taxpayer’s Position

18. The taxpayer's position is based on the information you submitted to us and the additional representations made by the representative in another identical file, which he asked to be taken into account in this file.

19. It is the position of the taxpayer's representative that the issuance of shares in repayment of a debt constitutes an amount paid equal either to the FMV of the shares or to the stated capital of the shares issued, and that a deduction pursuant to paragraph 20(1)(f) is allowed to the extent that the FMV or stated capital of the shares issued exceeds the amount received on the issuance of the debt.

20. The definition of "paid-up capital" is found in subsection 89(1). This definition essentially provides that the starting point is the stated capital established under the applicable corporate law. Thus, under the QCA, a corporation will pay into the issued and paid-up share capital account the value of the contribution received in consideration for the shares it issues. The value of the contribution received corresponds to the FMV of the convertible debentures. Consequently, having issued XXXXXXXXXX Class A shares in full, which were then trading at a price ranging from $XXXXXXXXXX to $XXXXXXXXXX per share, Corporation acknowledged having received a capital contribution of $XXXXXXXXXX and therefore this amount was to be included in the stated capital.

21. In this regard, he argues that the jurisprudence (Teleglobe v. The Queen, 2000 DTC 2493, King Rentals Ltd. v. The Queen, 96 DTC 1132, Marina Québec Inc. v. M.N.R., 92 DTC 1337, Praxair Canada Inc. v. The Queen, 93 DTC 5100 and Tuxedo Holdings Co. Ltd. v. M.N.R., 59 DTC 1102) also recognizes that the amount paid in discharge of an obligation is either equal to the amount added to the legal stated capital of the shares issued by the debtor corporation, or equal to the FMV of those shares.

22. In King Rentals Ltd, the judge stated that by issuing shares in full settlement of its debts, the issuer of the shares waives its right to receive the price it would have been entitled to receive upon subscription for the shares. In this regard, the representative cites the following comments made by the judge in King Rentals Ltd:

"... What it gave up was the right to call upon the allottees of the shares for payment of the par value of each share...

... I conclude from this jurisprudence that, provided there is no abuse, the amount agreed upon between the subscriber and the corporation and added to the paid-up capital of the shares is conclusive of the amount paid by the corporation debtor to retire the debt."

He also quotes the following comments in the Teleglobe judgment:

"... This Court has held that provided there is no abuse, the amount agreed between the subscriber-creditor for the shares and the issuing company and added to the paid-up capital of the shares is conclusive of the amount paid by the corporate shareholder to retire a debt, for example."

23. In support of the view that the amount paid was equal to the FMV, he relied on Praxair Canada Inc. and quoted the following comment by the judge:

"... If this jurisprudence, and that referred to above, has any value at all in this case, it suggests that is the real or actual value of the shares which must be considered rather than the par value even if the issuing corporation has agreed to issue them at their par value as fully paid."

He also quotes the following comments from Marina Québec Inc:

"... The court has reached the conclusion that the fair market value of each share in question was 1$. Accordingly, the value of the shares is equal to the value of the inventory transferred."

24. In his view, his interpretation of paragraph 19 is similar to a position of the Canada Customs and Revenue Agency ("CCRA"). In this regard, he cites Question 60 of the 1988 Canadian Tax Foundation Roundtable in which the CCRA indicated that an issue of shares from treasury would represent payment of an otherwise deductible expense for the issuing corporation.

25. According to the representative, Parliament recognizes this position in tax matters, since for the purposes of paragraph 80(2)(g), a share issued by a corporation in settlement of a debt incurred by the corporation is deemed to be an amount paid equal to the FMV of the share issued at the time it was issued. He also refers to paragraph 11 of IT-293R.

26. In his view, the value of the contribution received for the shares corresponds to the fair value of the convertible debentures, which is a direct function of the market price of the shares, and it is this amount that should be included in the stated capital of the shares. In this regard, he cites the following commentary from Marina Québec Inc:

"... The full or nominal value of any share of whatever nature, must be paid in order for the share to be considered lawfully issued. To have been a valid transaction, therefore, the value of the preferred shares issued by MR Inc. must have been equal to the real value of the property acquired. The value of that inventory property was not disputed..."

In addition, although the above jurisprudence indicates that the fair value of the shares issued to be taken into consideration in such a situation is either the stated capital of the shares issued or their FMV, for present purposes, this element in no way affects the final result since the stated capital of the shares issued is equal to their FMV.

27. The taxpayer's representative is of the view that it would be erroneous to rely on the stated capital appearing in the financial statements since, according to the accounting standards established by the CICA (Section 3860 of the CICA Handbook and EIC-69), it is the book value and not the FMV of the debt that is transferred to share capital on the conversion. The QCA bases the amount to be included in stated capital on the value of the contribution received and the amount of cash that the corporation would have received if it had issued the shares for cash, whereas the CICA Handbook bases the amount included in stated capital on the book value of the debt. Consequently, the legal stated capital is determined by the applicable corporate laws, and it is neither the financial statements nor the minutes of a corporation that determine it, although these may show, in certain cases, a stated capital identical to that determined by the applicable corporate law.

OUR COMMENTS:

Paragraph 20(1)(f) allows a deduction where an amount is paid in the year in satisfaction of the principal amount of an obligation on which interest was stipulated to be payable. Pursuant to subparagraph 20(1)(f)(ii), the amount of the deduction allowed is 3/4 of the lesser of the amount so paid and the amount by which the lesser of the principal amount of the obligation and all amounts paid in the year or in any preceding taxation year in satisfaction of its principal amount exceeds the amount for which the obligation was issued.

Subsection 248(1) defines the term "principal amount" as the maximum amount or maximum total amount, as the case may be, payable on account of the obligation by the issuer thereof, otherwise than as or on account of interest or as or on account of any premium payable by the issuer conditional on the exercise by the issuer of a right to redeem the obligation before the maturity thereof.

For an amount to be considered payable on account of the obligation, we are of the view that the issuer must have a legal obligation to pay that amount in accordance with the terms of the obligation. In the present situation, the issuer was obliged to repay the face value of the debenture if it redeemed the debentures early and at maturity. In those circumstances, if the holder exercised its conversion right, the issuer undertook to deliver XXXXXXXXXX Class A shares at an agreed price of $XXXXXXXXXX, equivalent to the face value. Consequently, the issuer had no obligation under the terms of the debenture to pay an amount in excess of the face value of the debenture.

The CCRA's position is that the issuance of shares in repayment of a debt constitutes an amount paid. As for the amount of the sum paid as repayment of the debt of the issuer of the share, we are of the view that the principles established in the following cases should be followed:

Teleglobe Canada Inc. v. The Queen, 2000 DTC 2493 (T.C.C.)

King Rentals Limited v. The Queen, 96 DTC 1132 (T.C.C.)

Marina Québec Inc. v. M.N.R., 92 DTC 1337 (T.C.C.)

Tuxedo Holding Co. Ltd v. M.N.R., 59 DTC 1102 (S.C.)

In King Rentals Limited, the issue was whether the FMV or stated capital of shares issued in satisfaction of a debt should be used to determine the amount paid, for the purposes of section 80 at that time. In this situation, the taxpayer had issued preferred shares with a stated capital of $700,000, i.e., the par value, in settlement of an unpaid debt of $700,000.

Based on the Canadian case of Tuxedo Holding Co. Ltd. and the British case of Stanton v. Dayton, [1982] 2 All E.R. 942, the Court determined that the stated capital of the shares was the appropriate amount and therefore decided that section 80 did not apply. In this regard, the Court quoted the following commentary from Stanton v. Dayton [1982] 2 All E.R. 942:

"... A company can issue its own shares as "consideration for the acquisition of property", as Lord Greene M.R. said. The value of consideration given in the form of fully paid shares allotted by the company is not the value of the shares allotted but, in the case of an honest and straightforward transaction, is the price upon which the parties agreed --- as Lord Simonds said."

In Marina Québec Inc. the taxpayer had acquired two lots of inventory in consideration for 603,081 redeemable preferred shares, each with a par value of $1.00. The question, among other things, was what the cost was of the inventory acquired in consideration for par value shares.

That judgment is based on the two British cases, Osborne v. Steel Barrel Co. Ltd. and Craddock v. Zevo Finance Co. Ltd. and the Canadian case of Tuxedo Holding Co. Ltd. which established that the cost to a corporation of the assets it has acquired is the price paid for those assets. This principle, as established in Zevo Finance Co. Ltd, was referred to in Marina Québec Inc. which, in this regard, we quote:

"...I think, true as a general proposition that where a company acquires property for fully paid shares of its own, the price paid by the company is, prima facia, the nominal value of the shares. It is for those who assert the contrary to establish it, as could be done, for example, in the suggested case of a deliberately inflated valuation..."

In our view, the Marina Québec case does not establish a new principle; it reiterates the principles established in Craddock v. Zevo Finance Co. Ltd. and Tuxedo Holding Co. Ltd. v MNR. Consequently, we do not agree with the taxpayer's representative that this case leads to the conclusion that the amount paid may be either equal to the FMV of the shares or to the stated capital. In fact, we are of the view that the jurisprudence has established that the treatment of the issuer and the holder of the shares may be different, that is, it is the stated capital of the shares issued that generally constitutes the cost of the property received in consideration for their issue and it is the FMV of such shares that is used to determine the tax consequences to the holder of the shares when the holder has transferred property in consideration for the acquisition of such shares.

In the present situation, the shares issued were shares without par value. Paragraph 5 of section 13 of the QCA provides that "[i]n the absence of other provisions in that respect in the constituting act or by-laws of the company, the shares without par value may be issued and allotted from time to time for such consideration, payable in cash, property or services, as may be fixed by the board of directors of the company…” Consequently, the determination of the issue price is left to the discretion of the Board of Directors and is not necessarily the market value of such shares.

In the present situation, the shares issued are common shares of no par value. Section 25(1) of the BCA provides that "subject to the articles, by-laws and any unanimous shareholder agreement and to section 28, shares may be issued at such times and to such persons and for such consideration as the directors may determine". Consequently, the determination of the issue price is left to the discretion of the Board of Directors and is not necessarily the market value of the share in question.

Section 4.1 of the Trust Deed provides that a debenture with a principal amount of $XXXXXXXXXX is convertible into fully paid common shares at a conversion price of $XXXXXXXXXX (XXXXXXXXXX) per share. The resolution of the Board of Directors relating to the issue of the debentures confirms this conversion price. We are of the view that under the terms of the trust indenture, Corporation has undertaken to issue common shares for a consideration of $XXXXXXXXXX per share and has waived its right to receive more for the issue of such shares where applicable.

In Teleglobe Canada Inc. v. The Queen, the taxpayer had acquired a business in consideration for, among other things, the issuance of common shares. This case reiterated the principles established in the above jurisprudence and the judge stated the following:

"I do not find any significant difference in the paid up capital of shares having a par or nominal value and the paid up capital of shares of a corporation incorporated under the provisions of the CBCA. When the directors of a CBCA corporation determine the consideration for the issue of the shares as consideration for property, it is no different from directors of a corporation deciding to issue a certain number of par value shares as consideration for property. In both situations, once the directors make such a decision, the corporation gives up its right to ask for more money or property. Rather than consideration being referable to the product of the par value of the share times the number of shares issued, the consideration is referable to the stated capital of the shares being issued as determined by the directors. Is there any significant difference if each of the 233,228,000 common shares had a par value of $0.9921536 (or a paid up capital of $231,397,979) or if the directors of the corporation determined that the paid up capital of the same number of common shares without par value to be $231,397,979? I suggest not. The stated capital of the shares issued for the property is the value placed by the corporation in its balance sheet and in its capital accounts, notwithstanding the fair market value of the property acquired at the time may be different. On the issue of shares with or without par value an amount is set up on the liabilities side of the balance sheet representing the amount of cash received for those shares or, if the consideration is other than cash, the value assigned to the assets for which the shares are issued. As Lord Greene cautioned, the money's worth of issued shares of the issuing corporation cannot be treated as though they were shares of another corporation. In the House of Lords, Viscount Simon concurred with Lord Greene, stating that "it is unsound to substitute alleged market values for what it in fact cost the taxpayer.""

In addition, the court stated:

"provided there is no abuse, the amount agreed upon between the subscriber-creditor for shares and the issuing company and added to the paid-up capital of the shares is conclusive of the amount paid by the corporate shareholder to retire a debt, for example."

Based on the above comments, we are of the view that the amount paid is the stated capital in respect of the Class A shares which reflects the price agreed between the corporation and the debenture holders. In our view, the price agreed between the parties is $XXXXXXXXXX per share issued and not the value of the share on the stock market at the time of issue.

The financial statements reflect an amount in the issued capital of Corporation equal to the face value of the debentures. However, the representative claims that the share capital in the financial statements does not represent the stated capital under corporate law. In this regard, the CCRA's position is that we assume that the financial statements reflect the stated capital under corporate law, unless other documents indicate otherwise. In the present situation, there is no documentation that would allow us to conclude that the stated capital is not that presented in the financial statements.

In Praxair Canada Inc. v. The Queen, 93 DTC 5100 (F.C.T.D.), the issue was whether the value of the shares received by the debenture holder in consideration for the settlement of the debentures, including accrued interest of $3,090,000, was equivalent to the par value or FMV of the shares received. The court determined that for the purposes of paragraph 12(1)(c), it was the actual value of the shares and not the par value of the shares that had to be taken into account.

In our view, the comment cited by the taxpayer's representative is limited to the facts of that case, which dealt with the determination of income to the debenture holder who had received shares in settlement of the debentures and the accrued interest. Furthermore, this case does not change the principle established in Zevo Finance Co. Ltd. and Tuxedo Holding Co. Ltd. Moreover, the Court cited an Australian case that commented on Zevo Finance Co. Ltd. as follows:

"The Zevo case merely laid down this proposition, that an investment company which has bought investments for fully paid shares by transactions which were not illusory is entitled to treat the par value of the shares as the cost to the company of the investments purchased by the company for fully paid shares. The case concerned only a company purchasing by the issue of fully paid shares. Quite apart from the fact that the transactions here were obviously illusory as a test of value, the Zevo case did not touch the question of the value of the shares in the hands of the person to whom they were issued. That value, as the Gold Coast case shows, was the fair intrinsic value or market value of the shares. Still less did it touch the question of the cost of the shares to the person to whom they were issued. In this case that cost was the value of what the Company paid for them."

Conclusion

We are of the view that Corporation cannot deduct an amount pursuant to subparagraph 20(1)(f)(ii) since the issuer was not obliged, under the terms of the debentures, to pay an amount that exceeded the face value of the debentures. The amount paid as a consequence of the conversion of the debentures was equal to the stated capital of the shares issued and this amount was equal to the amount for which the debentures were issued.

ACCESS TO INFORMATION

For your information, a copy of this memorandum will be severed using the Access to Information Act and will be available in the Legislative Access Database (LAD) located on the mainframe of the Canada Customs and Revenue Agency. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the Legislative Access Bank version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (613) 957-0682. A copy that has been severed in accordance with the Privacy Act will be sent to you for delivery to the client.

Acting Manager
Financing and Plans Section
Financing and Plans Division
Income Tax Rulings Directorate

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Text of Severed Letter

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.

FAITS

Position DU CONTRIBUABLE

NOS COMMENTAIRES:

Conclusion

ACCÈS À L'INFORMATION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principale Question:

Lorsque l'émetteur convertit des débentures convertibles en actions ordinaires, l'alinéa 20(1)f) de la Loi s'applique-t-il pour permettre à l'émetteur de déduire le montant de la JVM des actions ordinaires émises qui excède la somme pour laquelle le titre a été émis?

Position Adoptée:

Non.

RAISON POUR POSITION ADOPTÉE:

En vertu de l'acte de fiducie, le prix de conversion est égal à la valeur nominale de la dette et représente le capital déclaré des actions émises.

Le 24 avril 2001

Bureau des services fiscaux de XXXXXXXXXX  	Administration centrale
		                                    Division des industries
À l'attention de XXXXXXXXXX 	                  financières
                                                L. J. Roy, CGA

			                              2000-003767

Débentures convertibles - XXXXXXXXXX

La présente fait suite à votre note de service du 7 juillet 2000 par laquelle vous nous demandez notre opinion relativement à l'application du sous-alinéa 20(1)f)(ii) de la Loi de l'impôt sur le revenu (ci-après la "Loi").

Notre compréhension des faits relativement à la situation que vous nous avez soumise est la suivante.

FAITS

1. XXXXXXXXXX (ci-après la "SOCIÉTÉ") est une société régie par la Loi sur les sociétés par actions, L.R.C. (1985), ch. C-44 (ci-après la "LSA").

2. Le XXXXXXXXXX, le conseil d'administration a approuvé par résolution l'émission de débentures. La résolution signée du XXXXXXXXXX, se lit comme suit:

XXXXXXXXXX.

3. En vertu d'un acte de fiducie signé le XXXXXXXXXX, SOCIÉTÉ a émis XXXXXXXXXX $ de débentures convertibles. XXXXXXXXXX.

4. Les débentures étaient convertibles, au gré de leurs porteurs, en actions ordinaires de SOCIÉTÉ en tout temps avant la fermeture des bureaux le dernier jour ouvrable qui précédait le XXXXXXXXXX ou, si elles étaient appelées au remboursement par anticipation, la date fixée pour leur remboursement, selon la première de ces éventualités. Sous réserve de rajustements dans certains cas, le prix de conversion était de XXXXXXXXXX $ l'action ordinaire, soit un taux d'environ XXXXXXXXXX actions ordinaires par tranche de XXXXXXXXXX $. Suite à un fractionnement 2 pour 1, le prix de conversion est devenu XXXXXXXXXX $, soit un taux d'environ XXXXXXXXXX actions ordinaires par tranche de XXXXXXXXXX $ de débenture.

5. Sous réserve des lois applicables en matière de valeur mobilière, SOCIÉTÉ pouvait acheter pour cancellation les débentures sur le marché au moyen d'une offre identique soumise à tous les porteurs de débentures, à des prix non supérieurs à XXXXXXXXXX% de leur montant en capital, plus les intérêts courus et impayés à la date de l'achat et les frais d'achat.

6. Le XXXXXXXXXX, le cours de clôture des actions ordinaires était de XXXXXXXXXX $ à la Bourse de XXXXXXXXXX.

7. Les débentures n'étaient pas remboursables par anticipation avant le XXXXXXXXXX. Par la suite et avant le XXXXXXXXXX, elles étaient remboursables par anticipation au gré de SOCIÉTÉ uniquement si le cours moyen pondéré auquel les actions ordinaires de SOCIÉTÉ se négociaient à la Bourse de XXXXXXXXXX pendant les XXXXXXXXXX jours de bourse consécutifs qui prenaient fin non plus de cinq jours ouvrables avant la date ou l'avis de remboursement par anticipation était supérieur à XXXXXXXXXX $ l'action soit XXXXXXXXXX% du prix de conversion à cette date. À compter du XXXXXXXXXX, les débentures étaient remboursables par anticipation, au gré de la SOCIÉTÉ, en tout temps, au pair, avec les intérêts courus.

8. Toutes les débentures étaient de rang égal et proportionnelles. Elles constituaient des obligations directes non-garanties de la SOCIÉTÉ et elles étaient de rang subordonné à l'ensemble de sa dette prioritaire.

9. Le produit net des débentures a été investi en actions dans XXXXXXXXXX Les intérêts sur les débentures étaient déductibles en vertu de l'alinéa 20(1)c) de la Loi.

10. Du XXXXXXXXXX, des débentures totalisant XXXXXXXXXX $ ont été graduellement converties en actions ordinaires de SOCIÉTÉ. Du XXXXXXXXXX, les détenteurs de débentures ont converti des débentures d'une valeur au livre de XXXXXXXXXX $. La balance des débentures de XXXXXXXXXX $ a été rachetée au cours de l'exercice XXXXXXXXXX.

11. Au moment des conversions, la côte boursière des actions ordinaires de SOCIÉTÉ se situait entre XXXXXXXXXX $ et XXXXXXXXXX $ par action.

12. Lors de la conversion des débentures, XXXXXXXXXX actions ordinaires ont été émises. Sur cette base, le représentant du contribuable énonce que la juste valeur marchande (ci-après la "JVM") des débentures est de XXXXXXXXXX $.

13. Aux fins comptables, le capital social des actions ordinaires a été augmenté d'un montant égal à la valeur nominale des débentures converties et aucune autre somme n'a été enregistrée relativement aux débentures. En outre, à la note XXXXXXXXXX des états financiers du XXXXXXXXXX, la juste valeur des débentures convertibles au XXXXXXXXXX Cette juste valeur était fondée sur les flux de trésorerie futurs actualisés au taux d'intérêt pratiqué à ce moment sur le marché pour une dette dont l'échéance était la même.

14. L'émission des actions a été faite en acquittement du principal des débentures, et non au titre de paiement d'intérêts.

15. XXXXXXXXXX.

16. SOCIÉTÉ réclame en vertu du sous-alinéa 20(1)f)(ii) de la Loi, une déduction additionnelle de XXXXXXXXXX.

17. SOCIÉTÉ demande un report de la perte de XXXXXXXXXX à l'année XXXXXXXXXX pour un montant de XXXXXXXXXX $. Elle demande également un autre report de la perte de l'année XXXXXXXXXX aux années XXXXXXXXXX pour des montants de XXXXXXXXXX $ et XXXXXXXXXX $.

Position DU CONTRIBUABLE

18. La position du contribuable est basée sur l'information que vous nous avez soumise ainsi que les représentations supplémentaires du représentant dans un autre dossier identique à l'égard desquelles il a demandé qu'on tienne compte dans le présent dossier.

19. Le représentant du contribuable est d'avis que l'émission d'actions à titre de remboursement d'une dette constitue une somme payée qui est soit égale à la JVM des actions, ou soit égale au capital déclaré des actions émises, et qu'une déduction en vertu de l'alinéa 20(1)f) de la Loi est permise dans la mesure où la JVM ou le capital déclaré des actions émises excède la somme reçue à l'émission de la dette.

20. La définition de "capital versé" se trouve au paragraphe 89(1) de la Loi. Cette définition prévoit essentiellement que le point de départ est le capital déclaré établi selon le droit corporatif applicable. Ainsi, en vertu de la LSA, une société versera au compte de capital-actions émis et payé la valeur de l'apport reçu en contrepartie des actions qu'elle émet. La valeur de l'apport reçu correspond à la JVM des débentures convertibles. Par conséquent, SOCIÉTÉ ayant émis en totalité XXXXXXXXXX actions (XXXXXXXXXX) qui se transigeaient alors à un prix variant de XXXXXXXXXX $ à XXXXXXXXXX $ l'action, elle reconnaît avoir reçu un apport de capital de XXXXXXXXXX $ et donc ce montant a été versé à son capital-actions émis et payé.

21. À cet égard, il soutient que la jurisprudence (Teleglobe c. La Reine, 2000 DTC 2493, King Rentals Ltd. c. la Reine, 96 DTC 1132, Marina Québec Inc. c. M.N.R., 92 DTC 1337, Praxair Canada Inc. c. La Reine, 93 DTC 5100 et Tuxedo Holdings Co. Ltd. c. M.N.R., 59 DTC 1102) reconnaît également que la somme payée pour l'acquittement d'une obligation est soit égale au montant ajouté au capital déclaré légal des actions émises par la société débitrice, soit égale à la JVM desdites actions.

22. Dans l'arrêt King Rentals Ltd, le juge précise qu'en émettant des actions en règlement total de ses dettes, l'émetteur des actions renonce à son droit de recevoir le prix auquel il aurait été de plein droit de recevoir lors de la souscription de ces actions. À cet égard, le représentant cite les commentaires suivants du juge dans la cause King Rentals Ltd:

"... What it gave up was the right to call upon the allottees of the shares for payment of the par value of each shares...

... I conclude from this jurisprudence that, provided there is no abuse, the amount agreed upon between the subscriber and the corporation and added to the paid-up capital of the shares is conclusive of the amount paid by the corporation debtor to retire the debt."

En outre, il cite le commentaire suivant de l'arrêt Teleglobe:

"... This court has held that provided there is no abuse, the amount agreed between the subscriber-creditor for the shares and the issuing company and added to the paid-up capital of the shares is conclusive of the amount paid by the corporate shareholder to retire a debt, for example."

23. Pour appuyer que le montant de la somme payée est égal à la JVM, il invoque l'arrêt Praxair Canada Inc. et cite le commentaire suivant du juge:

"... If this jurisprudence, and that referred to above, has any value at all in this case, it suggests that is the real or actual value of the shares which must be considered rather than the par value even if the issuing corporation has agreed to issue them at their par value as fully paid."

En outre, il cite le commentaire suivant de l'arrêt Marina Québec Inc.:

"... The court has reached the conclusion that the fair market value of each share in question was 1$. Accordingly, the value of the shares is equal to the value of the inventory transferred."

24. Selon lui, son interprétation au paragraphe 23 est similaire à une position de l'Agence des Douanes et du Revenu du Canada (ci-après l'"ADRC"). À cet égard, il cite la question 60 de la table ronde de 1988 de l'Association Canadienne d'Études Fiscales dans laquelle l'ADRC a indiqué qu'une émission d'actions de la trésorerie représenterait un paiement d'une dépense autrement déductible pour la société émettrice.

25. D'après le représentant, le législateur reconnaît cette position en matière fiscale, puisque dans le cadre de l'application de l'alinéa 80(2)g) de la Loi, une action émise par une société en règlement d'une dette contractée par la société est réputée être un montant payé égal à la JVM de l'action émise au moment de son émission. En outre, il réfère au paragraphe 11 du IT-293R.

26. À son avis, la valeur de l'apport reçu pour les actions correspond à la juste valeur des débentures convertibles, qui est directement fonction du cours boursier des actions, et c'est cette somme qui est à porter au capital déclaré des actions. À cet égard, il cite le commentaire suivant de l'arrêt Marina Québec Inc.:

"... The full or nominal value of any share of whatever nature, must be paid in order for the share to be considered lawfully issued. To have been a valid transaction, therefore, the value of the preferred shares issued by MR Inc. must have been equal to the real value of the property acquired. The value of that inventory property was not disputed..."

En outre, bien que la jurisprudence précitée indique que la juste valeur des actions émises à prendre en considération dans une telle situation est soit le capital déclaré des actions émises ou leur JVM, pour les fins présentes, cet élément n'affecte aucunement le résultat final puisque le capital déclaré des actions émises est égal à la JVM.

27. Le représentant du contribuable est d'avis qu'il serait erroné de s'appuyer sur le capital déclaré apparaissant aux états financiers puisque selon les normes comptables établies par l'ICCA (chapitre 3860 du manuel de l'ICCA et le CPN-69), c'est la valeur comptable et non la JVM de la dette qui est virée au capital-actions lors de la conversion. La LSA base le montant à porter au capital déclaré sur la valeur de l'apport reçu et le montant du numéraire que la société aurait reçu si elle avait émis les actions contre du numéraire, alors que le manuel de l'ICCA base le montant porté au capital déclaré sur la valeur comptable de la dette. Par conséquent, le capital déclaré légal est déterminé par les lois corporatives applicables, et ce ne sont ni les états financiers, ni les procès verbaux d'une société qui le détermine, bien que ceux-ci peuvent montrer dans certains cas, un capital déclaré identique à celui déterminé par la loi corporative applicable.

NOS COMMENTAIRES:

L'alinéa 20(1)f) de la Loi permet une déduction lorsqu'une somme est payée au cours de l'année en acquittement du principal d'une obligation sur lequel un intérêt a été déclaré payable. En vertu du sous-alinéa 20(1)f)(ii) de la Loi, le montant de la déduction permise est de 3/4 du moins élevé de la somme ainsi payée et de l'excédent du moins élevé du principal et du total des sommes payées au cours de l'année ou d'une année d'imposition antérieure en acquittement du principal sur la somme pour laquelle le titre a été émis.

Le paragraphe 248(1) de la Loi définit l'expression "principal" comme la somme maximale payable au titre de l'obligation par celui qui l'a émise, selon les conditions de l'obligation, et autrement qu'au titre des intérêts ou d'une prime que verse l'émetteur lorsque celui-ci exerce le droit de racheter l'obligation avant l'échéance.

Pour qu'une somme soit considérée payable au titre de l'obligation, nous sommes d'avis que l'émetteur doit avoir l'obligation légale de payer cette somme selon les conditions de l'obligation. Dans la situation présente, l'acte de fiducie démontre que l'émetteur avait l'obligation de rembourser la valeur nominale de la débenture s'il remboursait les débentures par anticipation ou s'il les achetait pour cancellation sur le marché. En outre, si le détenteur exerçait son droit de conversion, l'émetteur s'engageait à remettre XXXXXXXXXX actions ordinaires à un prix convenu de XXXXXXXXXX $ soit l'équivalent de la valeur nominale. Par conséquent, l'émetteur n'avait pas l'obligation, selon les conditions de la débenture, de payer une somme qui excédait la valeur nominale de la débenture.

La position de l'ADRC est à l'effet que l'émission d'actions à titre de remboursement d'une dette constitue une somme payée. Quant au montant de la somme payée à titre de remboursement de la dette pour l'émetteur de l'action, nous sommes d'avis que les principes établis dans les causes suivantes doivent être suivis:

		Teleglobe Canada Inc. c. La Reine, 2000 DTC 2493 (C.C.I.)
		King Rentals Limited c. La Reine, 96 DTC 1132 (C.C.I.)
		Marina Québec Inc.c. M.N.R., 92 DTC 1337 (C.C.I..)
		Tuxedo Holding Co. Ltd c. M.N.R., 59 DTC 1102 (C. de l'É.)

Dans la cause King Rentals Limited, la question était de savoir si la JVM ou le capital déclaré des actions émis en règlement d'une dette devait être utilisé pour établir le montant payé, aux fins de l'article 80 de la Loi à ce moment. Dans cette situation, le contribuable avait émis des actions privilégiées dont le capital déclaré était de 700 000 $, soit la valeur nominale (par value), en règlement d'une dette impayée de 700 000 $.

En se basant sur la cause canadienne Tuxedo Holding Co. Ltd. et la cause britannique Stanton v. Dayton, [1982] 2 All E.R. 942, la Cour a établi que le capital déclaré des actions était le montant approprié et a donc décidé que l'article 80 n'était pas applicable. À cet égard, la Cour cite le commentaire suivant de la cause Stanton v. Dayton [1982] 2 All E.R. 942:

"... A company can issue its own shares as "consideration for the acquisition of property", as Lord Greene M.R. said. The value of consideration given in the form of fully paid shares allotted by the company is not the value of the shares allotted but, in the case of an honest and straightforward transaction, is the price upon which the parties agreed --- as Lord Simonds said."

Dans la cause Marina Québec Inc., le contribuable avait acquis deux lots d'inventaire en contrepartie de 603 081 actions privilégiées rachetables, chacune ayant une valeur nominale de 1,00 $. La question était, entre autres, de savoir quel était le coût des inventaires acquis en contrepartie d'actions avec valeur nominale.

Cet arrêt est fondé sur les deux causes britanniques, Osborne v. Steel Barrel Co. Ltd., et Craddock v. Zevo Finance Co. Ltd., et la cause canadienne Tuxedo Holding Co. Ltd. qui établit que le coût pour une société des actifs qu'elle a acquis est le prix payé pour ces actifs. Ce principe, tel qu'établi dans Zevo Finance Co. Ltd, a été référé dans Marina Québec Inc. qui à cet égard, nous citons:

"...I think, true as a general proposition that where a company acquires property for fully paid shares of its own, the price paid by the company is, prima facia, the nominal value of the shares. It is for those who assert the contrary to establish it, as could be done, for example, in the suggested case of a deliberately inflated valuation..."

À notre avis, la cause Marina Québec n'établit pas un nouveau principe, elle reprend les principes établis dans la cause Craddock v. Zevo Finance Co. Ltd., et la cause Tuxedo Holding Co. Ltd. v MNR. Par conséquent, nous ne sommes pas d'accord avec le représentant du contribuable à l'effet que cette cause permet de conclure que la somme payée puisse être soit égale à la JVM des actions ou au capital déclaré. En fait, nous sommes d'avis que la jurisprudence a plutôt établi que le traitement de l'émetteur et du détenteur des actions peut être différent, c'est-à-dire, c'est le capital déclaré des actions émises qui constitue généralement le coût des biens reçus en contrepartie de leur émission et c'est la JVM desdites actions qui est utilisée pour déterminer les conséquences fiscales pour le détenteur des actions lorsqu'il a tranféré des biens en contrepartie de l'acquisition desdites actions.

Dans la situation présente, les actions émises sont des actions ordinaires sans valeur nominale. Le paragraphe 25(1) de la LSA prévoit que "sous réserve des statuts, des règlements administratifs et de toute convention unanime des actionnaires et de l'article 28, les administrateurs peuvent déterminer la date des émissions d'actions, les personnes qui peuvent souscrire et l'apport qu'elles doivent fournir". Par conséquent, la fixation du prix d'émission est laissée à la discrétion de conseil d'administration et n'est pas obligatoirement la valeur marchande de ladite action.

Le paragraphe 4.1 de l'acte de fiducie prévoit qu'une débenture ayant un principal de XXXXXXXXXX $ est convertible en actions ordinaires entièrement libérées à un prix de conversion de XXXXXXXXXX $ (XXXXXXXXXX) l'action. La résolution du conseil d'administration relativement à l'émission des débentures confirme ce prix de conversion. Nous sommes d'avis que selon l'acte de fiducie, SOCIÉTÉ s'est engagée à émettre des actions ordinaires pour une contrepartie de XXXXXXXXXX $ l'action et a renoncé à recevoir plus pour l'émission de ces actions selon le cas.

Dans la cause Teleglobe Canada Inc c. La Reine, le contribuable avait acquis une entreprise en contrepartie, entre autres, de l'émission d'actions ordinaires. Cette cause reprend les principes établis dans la jurisprudence susmentionnée et le juge énonce ce qui suit:

"I do not find any significant difference in the paid up capital of shares having a par or nominal value and the paid up capital of shares of a corporation incorporated under the provisions of the CBCA. When the directors of a CBCA corporation determine the consideration for the issue of the shares as consideration for property, it is no different from directors of a corporation deciding to issue a certain number of par value shares as consideration for property. In both situations, once the directors make such a decision, the corporation gives up its right to ask for more money or property. Rather than consideration being referable to the product of the par value of the share times the number of shares issued, the consideration is referable to the stated capital of the shares being issued as determined by the directors. Is there any significant difference if each of the 233,228,000 common shares had a par value of $0.9921536 (or a paid up capital of $231,397,979) or if the directors of the corporation determined that the paid up capital of the same number of common shares without par value to be $231,397,979? I suggest not. The stated capital of the shares issued for the property is the value placed by the corporation in its balance sheet and in its capital accounts, notwithstanding the fair market value of the property acquired at the time may be different. On the issue of shares with or without par value an amount is set up on the liabilities side of the balance sheet representing the amount of cash received for those shares or, if the consideration is other than cash, the value assigned to the assets for which the shares are issued. As Lord Greene cautioned, the money's worth of issued shares of the issuing corporation cannot be treated as though they were shares of another corporation. In the House of Lords, Viscount Simon concurred with Lord Greene, stating that "it is unsound to substitute alleged market values for what it in fact cost the taxpayer."

En outre, la cour énonce ceci:

"provided there is no abuse, the amount agreed upon between the subscriber-creditor for shares and the issuing company and added to the paid-up capital of the shares is conclusive of the amount paid by the corporate shareholder to retire a debt, for example."

Basé sur les commentaires susmentionnés, nous sommes d'avis que la somme payée est le capital déclaré relativement aux actions ordinaires qui reflète le prix convenu entre la société et les détenteurs de débentures. À notre avis, le prix convenu entre les parties est de XXXXXXXXXX $ par action émise et non la valeur de l'action sur le marché boursier au moment de l'émission.

Les états financiers reflètent un montant au capital émis de SOCIÉTÉ égal à la valeur nominale des débentures. Toutefois, le représentant prétend que le capital social aux états financiers ne représente pas le capital déclaré au niveau des lois corporatives. À cet égard, la position de l'ADRC est à l'effet que nous présumons que les états financiers reflètent le capital déclaré en vertu des lois corporatives, à moins que d'autres documents indiquent le contraire. Dans la situation présente, aucun document ne nous permet de conclure que le capital déclaré n'est pas celui présenté aux états financiers.

En ce qui concerne la cause Praxair Canada Inc. c. La Reine, 93 DTC 5100 (C.F. 1re inst.), la question était de savoir si la valeur des actions reçues par le détenteur de débentures en contrepartie du règlement des débentures incluant des intérêts courus de 3 090 000 $, était équivalent à la valeur nominale ou la JVM des actions reçues. La cour a établi que pour les fins de l'alinéa 12(1)c) de la Loi, c'est la valeur réelle des actions et non la valeur nominale des actions qui devait être pris en compte.

À notre avis, le commentaire cité par le représentant du contribuable est limité aux faits de cette cause qui traitait de la détermination du revenu pour le détenteur de débentures qui avait reçu des actions en règlement des débentures et des intérêts accrus. En outre, cette cause ne change aucunement le principe établi dans Zevo Finance Co. Ltd. et la cause Tuxedo Holding Co. Ltd. D'ailleurs, la cour a cité une cause australienne qui commentait Zevo Finance Co. Ltd. comme suit :

"The Zevo case merely laid down this proposition, that an investment company which has bought investments for fully paid shares by transactions which were not illusory is entitled to treat the par value of the shares as the cost to the company of the investments purchased by the company for fully paid shares. The case concerned only a company purchasing by the issue of fully paid shares. Quite apart from the fact that the transactions here were obviously illusory as a test of value, the Zevo case did not touch the question of the value of the shares in the hands of the person to whom they were issued. That value, as the Gold Coast case shows, was the fair intrinsic value or market value of the shares. Still less did it touch the question of the cost of the shares to the person to whom they were issued. In this case that cost was the value of what the Company paid for them."

Conclusion

Nous sommes d'avis que SOCIÉTÉ ne peut pas déduire une somme en vertu du sous-alinéa 20(1)f)(ii) de la Loi puisque l'émetteur n'avait pas l'obligation, selon les conditions de la débenture, de payer une somme qui excédait la valeur nominale de la débenture. La somme payée par la suite de la conversion des débentures est égale au capital déclaré des actions émises et ce montant est égal à la somme pour laquelle les débentures ont été émises.

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Gestionnaire intérimaire
Section du financement et des régimes
Division des industries financières
Direction des décisions en impôt

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 143.3 - Subsection 143.3(3) - Paragraph 143.3(3)(a) - Subparagraph 143.3(3)(a)(ii)

under pre-s. 143.3 Act, where shares issued for property, the shares’ stated capital determines the property’s cost, whereas the cost of the shares to the shareholder is their FMV

Before finding that, on a (pre-s. 143.3) conversion of convertible debentures through the issuance of shares with a lower stated capital than their FMV, no premium could be deducted under s. 20(1)(f)(ii), the Directorate stated:

[T]he jurisprudence has established that the treatment of the issuer and the holder of the shares may be different, that is, it is the stated capital of the shares issued that generally constitutes the cost of the property received in consideration for their issue and it is the FMV of such shares that is used to determine the tax consequences to the holder of the shares when the holder has transferred property in consideration for the acquisition of such shares.

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24 April 2001 Internal T.I. 2000-0037677 F - DEBENTURES CONVERTIBLES

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