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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
1. Whether the debentures constitute borrowed money for the purpose of paragraph 20(1)(c).
2. Whether subsection 104(7.1) will apply to deny a deduction to the Trust recipient under paragraph 104(6)(b) of amounts payable to its unitholders.
Position:
1. Yes.
2. No.
Reasons:
1. Facts support that there is borrowed money and the funds are to be used for purpose set forth in XXXXXXXXXX
2. Generally, multi-class structured trusts may be permissible so long as the units aren't structured with the objective of giving an interest in the capital of the trust that exceeds the income entitlement of the class. The difference in dividend rates between the two classes of capital units is to compensate for the fact that one class is redeemable after XXXXXXXXXX years where the other is only redeemable on maturity. XXXXXXXXXX .
XXXXXXXXXX 2001-010847
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you request an advance tax ruling on behalf of the above-named taxpayer. We also acknowledge the information provided in your subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).
We understand that, to the best of your knowledge and that of the taxpayer referred to above, none of the issues involved in the ruling request is:
(i) in an earlier return of the taxpayer or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
(iii) under objection by the taxpayer or a related person;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) the subject of a ruling previously issued by the Directorate.
In this letter, unless otherwise indicated, all statutory references are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act"), and all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the facts, proposed transactions and their purposes is as follows:
Definitions
The following terms have the meanings specified:
"XXXXXXXXXX Securities" means the Trust Securities, issuable in series, being non-voting units of beneficial interest in the Trust which will be offered for investment to the public in Canada as described more fully below;
"Company" means XXXXXXXXXX;
"Debenture" or "Debentures" means the senior debentures of the Company as described more fully in paragraphs 22-29 below;
"Holdco" means XXXXXXXXXX;
XXXXXXXXXX
XXXXXXXXXX
"Net Distributable Funds" means, at any time, the amount by which the sum of (i) income and gains derived by the Trust and (ii) amounts received by the Trust from Company exceeds expenses of the Trust and any required liability for expenses established by the Trust;
XXXXXXXXXX
XXXXXXXXXX
"Public Preferred Shares" means preferred shares of the Company which (i) have been issued to the public (excluding to affiliates of the Company), (ii) are listed on a recognized stock exchange, and (iii) XXXXXXXXXX;
XXXXXXXXXX
"XXXXXXXXXX Securities" means the XXXXXXXXXX Trust Securities, being voting units of beneficial interest of the Trust to be owned by the Company or any of its affiliates as described more fully in paragraph 7 below;
XXXXXXXXXX;
"Trust" means XXXXXXXXXX to be established as described in more fully in paragraphs 5-13 below; and
XXXXXXXXXX
Facts
1. The Company is a XXXXXXXXXX company incorporated under the laws of Canada, is a "taxable Canadian corporation" and a "XXXXXXXXXX" under the Act, and carries on XXXXXXXXXX business in XXXXXXXXXX Its business number is XXXXXXXXXX and the Company files its tax returns through the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre.
2. The authorized capital of the Company consists of XXXXXXXXXX the only shares of the Company outstanding were the common shares, all of which were owned by Holdco.
3. Holdco was incorporated XXXXXXXXXX and the Company is a wholly-owned subsidiary of Holdco. Holdco is a "taxable Canadian corporation" and a "XXXXXXXXXX" under the Act. The authorized capital of Holdco consists of an unlimited number of common shares, an unlimited number of XXXXXXXXXX, and an unlimited number of XXXXXXXXXX, only common shares of Holdco were issued and outstanding. The common shares are listed on the XXXXXXXXXX.
4. XXXXXXXXXX.
Proposed Transactions
5. The Trust will be established by way of declaration of trust under the laws of XXXXXXXXXX and will be resident in Canada for purposes of the Act. The trustee of the Trust will be a trust company licensed to do business in Canada. The capital of the Trust will be represented by units of beneficial interest in the Trust.
6. The terms of the units of the Trust will be such that the Trust will qualify as a unit trust described in paragraph 108(2)(a) of the Act.
7. The Trust proposes to issue two classes of units - XXXXXXXXXX Securities and XXXXXXXXXX Securities. The XXXXXXXXXX Securities are expected to represent approximately XXXXXXXXXX % of the total capital of the Trust represented by units, will be voting and will be subscribed for cash. The XXXXXXXXXX Securities will be owned at all material times by the Company or affiliates of the Company. On the closing date the Company will subscribe for XXXXXXXXXX Securities for an issue price of $XXXXXXXXXX each.
8. XXXXXXXXXX.
9. XXXXXXXXXX The Indicated Yield is non-cumulative and will be payable only to the extent that the Trust earns sufficient net distributable funds to permit distributions in an amount equal to the Indicated Yield. On each Distribution Date that is a "Regular Distribution Date" XXXXXXXXXX the Trust will pay the Indicated Yield on the XXXXXXXXXX Securities (if sufficient net distributable funds exist) and any remaining net distributable funds on the XXXXXXXXXX Securities. If there is insufficient net distributable funds to pay the full amount of the Indicated Yield on the XXXXXXXXXX Securities, the net distributable funds available will be distributed between the XXXXXXXXXX and XXXXXXXXXX Securities on a proportionate basis.
10. The Indicated Yield will not be payable by the Trust to holders of the XXXXXXXXXX Securities in the event that a Distribution Diversion Event occurs or is continuing. In such circumstances, all of the net distributable funds, if any, of the Trust will be distributed to the holder of the XXXXXXXXXX Securities. A "Distribution Diversion Event" will be defined to be the failure by the Company to declare dividends on its XXXXXXXXXX Shares (the "XXXXXXXXXX Shares") or, if there are Public Preferred Shares outstanding, the failure by the Company to declare dividends on any Public Preferred Shares, in accordance with their respective terms, in either case in the XXXXXXXXXX period immediately prior to the commencement of the period ending on the day preceding the next Distribution Date. Once a Distribution Diversion Event no longer exists, the Indicated Yield will once again be payable by the Trust to holders of the XXXXXXXXXX Securities as described above. XXXXXXXXXX.
11. XXXXXXXXXX.
12. The Trust will cause all of its net distributable funds, if any, to be payable annually to the holders of XXXXXXXXXX Securities, to a maximum of the Indicated Yield, and then to the holder of XXXXXXXXXX Securities, in respect of any balance of net distributable funds of the Trust.
13. The property of the Trust will be limited to the Debentures (or the XXXXXXXXXX Shares into which the Debentures are converted or for which they are exchanged), cash, amounts receivable from third parties, and Government of Canada debt obligations.
14. XXXXXXXXXX.
15. XXXXXXXXXX.
16. XXXXXXXXXX.
17. XXXXXXXXXX.
18. XXXXXXXXXX.
19. Accordingly, upon a Loss Absorption Event, holders of XXXXXXXXXX Securities will receive XXXXXXXXXX Shares or XXXXXXXXXX Shares, as the case may be, for each XXXXXXXXXX Security held by them.
20. On and after the XXXXXXXXXX Securities may be purchased by the Trust for cancellation in the open market or by tender or private contract at any price.
21. In the event of the termination of the Trust, holders of the XXXXXXXXXX Securities and the XXXXXXXXXX Securities will be entitled to participate, pari passu, in the distribution of the remaining property of the Trust.
22. XXXXXXXXXX.
23. XXXXXXXXXX.
24. XXXXXXXXXX.
25. XXXXXXXXXX.
26. XXXXXXXXXX.
27. XXXXXXXXXX.
28. The Debentures will be a senior unsecured obligation of the Company and will rank equally with all other unsecured and unsubordinated liabilities of the Company, XXXXXXXXXX, failure by the Company to make payment under the Debentures in accordance with the terms thereof will not entitle the Trust to accelerate payment of the principal amount owing under the Debentures.
29. The Company will be required to pay in cash in full the principal amount of the Debentures and any accrued and unpaid interest thereon to the Trust at the maturity of the Debentures. XXXXXXXXXX, if a Loss Absorption Event occurs after maturity of any of the Debentures, the Trust will subscribe for, and the Company will issue, XXXXXXXXXX Shares or XXXXXXXXXX Shares, as applicable, to satisfy the Trust's obligation to deliver such shares to the holders of the then outstanding XXXXXXXXXX Securities.
30. The XXXXXXXXXX Shares and XXXXXXXXXX Shares will be identical in all respects except for the effective date of their exchange rights. Each will have an issue price of $XXXXXXXXXX per share. Accordingly, XXXXXXXXXX Shares or XXXXXXXXXX Shares will be issued for each $XXXXXXXXXX of principal amount of the Debenture converted upon the occurrence of a Loss Absorption Event. The XXXXXXXXXX Shares and XXXXXXXXXX Shares will carry a fixed, non-cumulative preferential cash dividend at a rate of approximately XXXXXXXXXX% per annum.
31. The XXXXXXXXXX Shares and XXXXXXXXXX Shares will not be redeemable by the Company prior to XXXXXXXXXX. On and after that date, the Company may, XXXXXXXXXX, redeem all or any part of the outstanding XXXXXXXXXX Shares or XXXXXXXXXX Shares by the payment of cash in an amount equal to the issue price per share plus all declared and unpaid dividends to the date fixed for redemption. The Company may, XXXXXXXXXX, deliver fully-paid and freely tradable Holdco common shares for each XXXXXXXXXX Share or XXXXXXXXXX Share so redeemed, the number of which will be determined by dividing the XXXXXXXXXX Share or XXXXXXXXXX Share Cash Redemption Price by the greater of (i) $XXXXXXXXXX and (ii) XXXXXXXXXX% of the weighted average trading price of such Holdco common shares on the XXXXXXXXXX for the XXXXXXXXXX consecutive trading days ending XXXXXXXXXX prior to the date fixed for redemption.
32. On and after the XXXXXXXXXX, the Company may at any time, XXXXXXXXXX, purchase XXXXXXXXXX Shares or XXXXXXXXXX Shares for cancellation in the open market.
33. The XXXXXXXXXX Shares will be exchangeable at the option of the holder thereof, provided that any Loss Absorption Event which has occurred is not then continuing, on the last day of June and December in each year commencing on XXXXXXXXXX on not more than 90 and not less than 60 days' prior written notice before the date fixed for exchange, into that number of fully-paid and freely tradable Holdco common shares determined by dividing $XXXXXXXXXX, together with any declared and unpaid dividends on the XXXXXXXXXX Shares to the date of exchange, by the greater of (i) $XXXXXXXXXX and (ii) XXXXXXXXXX% of the weighted average trading price of a Holdco common share on the XXXXXXXXXX during the XXXXXXXXXX consecutive trading day period XXXXXXXXXX immediately prior to the date of exchange. XXXXXXXXXX.
34. Holders of XXXXXXXXXX Shares or XXXXXXXXXX Shares will not have any voting rights except in certain extraordinary circumstances. The XXXXXXXXXX Shares and XXXXXXXXXX Shares will rank equally with all other non-cumulative preferred shares of every other series of XXXXXXXXXX Shares of the Company and in priority to the Company's common shares and any other shares ranking junior to the XXXXXXXXXX Shares and XXXXXXXXXX Shares.
35. XXXXXXXXXX.
36. XXXXXXXXXX.
37. XXXXXXXXXX.
Purpose of Proposed Transactions
38. The purpose of the proposed transactions is for the Company to raise financing XXXXXXXXXX.
39. XXXXXXXXXX.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, our rulings are as follows:
We confirm that
A. Provided that the proceeds from the issue of the Debentures are used and continue to be used for the purpose of earning income from a business or property and XXXXXXXXXX the Company will be entitled, pursuant to paragraph 20(1)(c) of the Act, to deduct in computing its income for a taxation year from business or property the amount paid in the year or payable in respect of the year (depending on the method regularly followed by the Company in computing its income) as interest on the Debenture to the extent that the amount paid or payable is reasonable and is paid pursuant to a legal obligation to pay interest.
B. Subsection 104(7.1) will not apply to deny a deduction to the Trust under paragraph 104(6)(b) of amounts payable to its unit holders.
The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R4 dated January 29, 2001 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
Manager
Financial Institutions Team
Financial Industries Division
Income Tax Rulings
Policy and Legislation Branch
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© Her Majesty the Queen in Right of Canada, 2001
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