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.
Summary Sheet
Principal Issues:
Subparagraph 212(1)(b)(vii) and events of default description
Position TAKEN:
The description of the events of default suggested by the writer would not be acceptable as to avail the debtor of the exemption to withhold tax.
Reasons FOR POSITION TAKEN:
Subparagraph 212(1)(b)(vii)(C) states that in the event of a failure or default, a lender can request repayment of an obligation. We are of the opinion that, for an event of default to be valid, it has to be determined or described and not left to the discretion of the lender as to what circumstances would trigger the repayment.
XXXXXXXXXX 2001-008718
Yves Leclerc
September 17, 2001
Dear XXXXXXXXXX:
Re : Subparagraph 212(1)(b)(vii) Exemption
This is in reply to your letter of June 6, 2001, concerning the interpretation of the exemption under subparagraph 212(1)(b)(vii) of the Income Tax Act (the "Act"). More specifically, you request our view whether or not, one of two hypothetical events of default would preclude the availability of the withholding exemption.
In your letter, you suggested the following events of default:
1. the occurrence or threatened occurrence of an event which, in the opinion of the lender, has a material adverse effect on the financial situation of the borrower; or
2. the occurrence or threatened occurrence of an event which has a material adverse effect on the financial situation of the borrower.
In the above sentences, the variation between them is the clause: "in the opinion of the lender". Subsection 212(1)(b)(vii) of the Act provides that the Canadian resident corporate borrower cannot, under any circumstances be obliged, pursuant to the terms of the agreement, or any agreement relating thereto, to pay more than 25% of the principal amount of the obligation within 5 years from the date of issue except, inter alia, "in the event of failure or default under the said terms or agreement". It is our position however, that in order to be acceptable, the events of failure or default must have commercial reality, must be beyond the control of the lender and must not be contrived.
If the decision to recall an obligation is left to the lender's own opinion with respect to the event, this would amplify the discretion of the lender and would give it control as to when a debt could be recalled. The lender could virtually choose any event it wishes. Therefore, it is our view that in particular, the insertion of the words " in the opinion of the lender" in a sentence, describing an event of default, would generally preclude the lender from qualifying for the exemption.
Also, both sentences that were suggested contain the words: " the occurrence or threatened occurrence of an event which has a material effect on the financial situation". We consider that the words are ambiguous and could give the lender virtually an open-ended opportunity to recall the obligation for reasons which they would consider material (i.e. even if the words "in the opinion of the lender" were deleted). Therefore, without any description of the types of events which would have "a material effect on the financial situation" of the borrower and which would permit the lender to demand the repayment of the obligation, we are of the opinion that the exemption sought would not be available.
We trust 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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