2002 Ruling 2002-0119453 - XXXXXXXXXX INTEREST DEDUCTIBILITY

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 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 10 years where the other is only redeemable on maturity. XXXXXXXXXX .

XXXXXXXXXX 								2002-011945

XXXXXXXXXX, 2002

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:

"Capital 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
XXXXXXXXXX
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) have an aggregate liquidation entitlement of at least $XXXXXXXXXX;

XXXXXXXXXX

"Special Securities" means the Special 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 Event" means XXXXXXXXXX;

"Trust" means XXXXXXXXXX Capital Trust 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 Canada and 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.

3. Holdco was incorporated XXXXXXXXXX and the Company is a wholly-owned subsidiary of Holdco. Holdco is a "taxable Canadian corporation" and a "public corporation" under the Act. The authorized capital of Holdco consists of XXXXXXXXXX As at XXXXXXXXXX common shares and XXXXXXXXXX Preferred Shares XXXXXXXXXX were issued and outstanding. 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).

7. The Trust proposes to issue two classes of units: Capital Securities and Special Securities. The Special 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 Special 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 Special Securities for an aggregate issue price of $XXXXXXXXXX.

8. The Trust proposes to issue two series of Capital Securities: Series A Capital Securities and Series B Capital Securities. The Capital Securities will be offered to the public in Canada by way of prospectus, and will be non-voting except in certain limited circumstances involving proposed changes to the terms and conditions of the Capital Securities. The Capital Securities are expected to be widely held and will account for approximately XXXXXXXXXX% of the capital of the Trust represented by units. The issue price for each Capital Security will be $XXXXXXXXXX.

9. Each of the two series of Capital Securities will XXXXXXXXXX (each a "Distribution Date"). Series A Capital Securities will have an XXXXXXXXXX of approximately XXXXXXXXXX%#1 per annum and the Series B Capital Securities an XXXXXXXXXX of approximately XXXXXXXXXX%. The XXXXXXXXXX and will be payable only to the extent that the Trust earns sufficient XXXXXXXXXX to permit distributions in an amount equal to the XXXXXXXXXX. On each Distribution Date that is a "Regular Distribution Date" (which will be any Distribution Date other than a Distribution Diversion Date - a "Distribution Diversion Date" will be a Distribution Date on which a Distribution Diversion Event, as defined below, occurs or is continuing), the Trust will pay the XXXXXXXXXX on the Capital Securities (if sufficient XXXXXXXXXX exist) and any remaining XXXXXXXXXX on the Special Securities. If there is insufficient XXXXXXXXXX to pay the full amount of the XXXXXXXXXX on the Capital Securities, the XXXXXXXXXX available will be distributed between the Series A and Series B Capital Securities on a proportionate basis.

10. The XXXXXXXXXX will not be payable by the Trust to holders of the Capital 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 Special Securities. A "Distribution Diversion Event" will be defined to be XXXXXXXXXX, in accordance with their respective terms, in either case in the three month 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 XXXXXXXXXX will once again be payable by the Trust to holders of the Capital Securities as described above. XXXXXXXXXX.

11. Where the Company does not have XXXXXXXXXX outstanding, Holdco will agree XXXXXXXXXX on any of its shares unless the Company has paid a dividend on its XXXXXXXXXX Shares within XXXXXXXXXX.

12. The Trust will cause all of its XXXXXXXXXX, if any, to be payable annually to the holders of Capital Securities, to a maximum of the XXXXXXXXXX, and then to the holder of Special Securities, in respect of any balance of XXXXXXXXXX of the Trust.

13. The property of the Trust will be limited to the Debentures (or the Series 2 Shares, Series 3 Shares, Series 4 Shares, or Series 5 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. Except upon the occurrence of a XXXXXXXXXX Event or XXXXXXXXXX Event, the Series A Capital Securities and the Series B Capital Securities will not be redeemable by the Trust until XXXXXXXXXX. On that date and on any Distribution Date thereafter, XXXXXXXXXX, and on not less that 30 days or more than 60 days prior notice to holders, the Trust at its option, may redeem all or part of the then outstanding Series A Capital Securities or Series B Capital Securities by the payment of an amount in cash. In the case of a redemption of Series A Capital Securities prior to XXXXXXXXXX, or of Series B Capital Securities prior to XXXXXXXXXX, such amount will be equal to the greater of (A) $XXXXXXXXXX per Series A Capital Security or Series B Capital Security, as the case may be, together with any unpaid XXXXXXXXXX on such series to the date of redemption (the "Series A or Series B Redemption Price"), and (B) XXXXXXXXXX (the "Series A or Series B Early Redemption Price"). In the case of a redemption of Series A Capital Securities on or after XXXXXXXXXX, or of Series B Capital Securities on or after XXXXXXXXXX, such amount will be the applicable Series A or Series B Redemption Price. XXXXXXXXXX.

15. Series A Capital Securities and Series B Capital Securities will be redeemable at the option of the Trust at any time upon the happening of a XXXXXXXXXX Event or a XXXXXXXXXX Event. Where a XXXXXXXXXX Event or a XXXXXXXXXX Event occurs prior to XXXXXXXXXX, in the case of Series A Capital Securities, or XXXXXXXXXX, in the case of Series B Capital Securities, the Trust may redeem the Series A Capital Securities or Series B Capital Securities for an amount of cash equal to the applicable Series A or Series B Early Redemption Price. Where a XXXXXXXXXX Event or a XXXXXXXXXX Event occurs on or after XXXXXXXXXX, in the case of Series A Capital Securities, or on or after XXXXXXXXXX, in the case of Series B Capital Securities, the Trust may redeem the Series A Capital Securities or Series B Capital Securities for an amount of cash equal to the applicable Series A or Series B Redemption Price.

16. Holders of Series A Capital Securities will have the right at any time to surrender all or part of their Series A Capital Securities for a price (the "Series A Exchange Price") for each Series A Capital Security equal to XXXXXXXXXX Class A Shares Series 2 of the Company (the "Series 2 Shares"). Holders of the Series B Capital Securities will have the same surrender rights but will receive, for each Series B Capital Security, XXXXXXXXXX Class A Shares Series 4 of the Company (the "Series 4 Shares") (the "Series B Exchange Price"). The Company will have the right to arrange for substituted purchasers to purchase Capital Securities tendered by a holder thereof for surrender to the Trust, so long as the holder has not withheld consent to the purchase at a price which is not less XXXXXXXXXX Series 2 Shares and Series 4 Shares will have the attributes described below in paragraph 37.

17. As required XXXXXXXXXX, all of the then outstanding Capital Securities will be automatically and mandatorily exchanged for, in respect of each Series A Capital Security, XXXXXXXXXX Class A Shares Series 3 of the Company ("Series 3 Shares") and, in respect of each Series B Capital Security, XXXXXXXXXX Class A Shares Series 5 of the Company ('Series 5 Shares"), upon one of the following events (each a "XXXXXXXXXX Event"): XXXXXXXXXX Series 3 Shares and Series 5 Shares will have the attributes described below in paragraphs 30-36.

18. The surrender of Capital Securities by a holder thereof to the Trust for Series 2 Shares and Series 4 Shares as described above in paragraph l6 and automatic exchange of Capital Securities for Series 3 Shares and Series 5 Shares as described above in paragraph 17 will be effected by the Trust:

a) converting $XXXXXXXXXX principal amount of the Series A Debenture (or Series B Debenture) held by it into XXXXXXXXXX Series 2 Shares (or XXXXXXXXXX Series 4 Shares) or XXXXXXXXXX Series 3 Shares (or XXXXXXXXXX Series 5 Shares), as applicable, in accordance with the terms thereof as set out below, for each Capital Security so exchanged or surrendered, and

b) redeeming each Series A Capital Security (or Series B Capital Security) in consideration for the transfer to the holder thereof by the Trust of XXXXXXXXXX Series 2 Shares (or XXXXXXXXXX Series 4 Shares) or XXXXXXXXXX Series 3 Shares (or XXXXXXXXXX Series 5 Shares), as applicable.

19. Accordingly, upon a XXXXXXXXXX Event, holders of Capital Securities will receive XXXXXXXXXX Series 3 Shares or XXXXXXXXXX Series 5 Shares, as the case may be, for each Capital Security held by them.

20. On and after the XXXXXXXXXX anniversary of the issue of the Capital Securities, XXXXXXXXXX, Capital 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 Capital Securities and the Special Securities will be entitled to participate, pari passu, in the distribution of the remaining property of the Trust.

22. Coincident with the establishment of the Trust and the issuance of the Capital Securities, the Company proposes to issue to the Trust two Debentures: "Series A Debenture" and "Series B Debenture". The Trust will subscribe for the Series A Debenture using the proceeds from the issue of the Series A Capital Securities and the Series B Debenture using the proceeds from the Series B Capital Securities. The Series A Debenture and the Series B Debenture will mature on XXXXXXXXXX. Interest on the Debentures will be payable XXXXXXXXXX (an "Interest Payment Date") and each of the two Debentures will carry a fixed rate of interest equal to the XXXXXXXXXX on the corresponding series of Capital Securities as described in paragraph 9 above.

23. It is intended that the proceeds from the issue of the Debentures will be used by the Company to acquire XXXXXXXXXX.

24. Except upon the occurrence of a XXXXXXXXXX Event or XXXXXXXXXX Event, the Series A Debenture and the Series B Debenture will not be redeemable by the Company prior to XXXXXXXXXX. The Series A Debenture and the Series B Debenture will be redeemable by the Company, XXXXXXXXXX, in whole or part on XXXXXXXXXX and on any Interest Payment Date thereafter for an amount in cash per $XXXXXXXXXX principal amount of the Series A Debenture or Series B Debenture. In the case of a Series A Debenture redemption prior to XXXXXXXXXX or a Series B Debenture redemption prior to XXXXXXXXXX ,#2 such amount (the "Series A or Series B Debenture Early Redemption Price") will be equal to the greater of (A) $XXXXXXXXXX plus any accrued and unpaid interest on such Debenture to the date of redemption (the "Series A or Series B Debenture Redemption Price"), and (B) the XXXXXXXXXX, determined on the business day immediately preceding the date on which the Company has given notice of the redemption of the Series A Debenture or Series B Debenture. In the case of a Series A Debenture redemption on or after XXXXXXXXXX or a Series B Debenture redemption on or after XXXXXXXXXX, such amount will be equal to the applicable Series A or Series B Debenture Redemption Price. XXXXXXXXXX.

25. Upon the occurrence of a XXXXXXXXXX Event or a XXXXXXXXXX Event, the Company, XXXXXXXXXX, may redeem at any time the Series A Debenture or Series B Debenture in whole (but not in part) for an amount in cash for each $XXXXXXXXXX principal amount of the Series A Debenture or Series B Debenture. If the Series A Debenture is redeemed prior to XXXXXXXXXX or the Series B Debenture is redeemed prior to XXXXXXXXXX, such amount will be equal to the applicable Series A or Series B Debenture Early Redemption Price. If the Series A Debenture is redeemed on or after XXXXXXXXXX or the Series B Debenture is redeemed on or after XXXXXXXXXX, such amount will be the applicable Series A or Series B Debenture Redemption Price. If the Company has redeemed the Series A Debenture or Series B Debenture, in whole or in part, the Trust will be required to redeem a corresponding amount of the Series A Capital Securities or Series B Capital Securities.

26. The Debentures will be convertible into shares of the Company at any time at the option of the holder as follows: (i) for the Series A Debenture, XXXXXXXXXX Series 2 Shares per $XXXXXXXXXX principal amount of the Series A Debenture, and (ii) for the Series B Debenture, XXXXXXXXXX Series 4 Shares per $XXXXXXXXXX principal amount of the Series B Debenture.

27. In order to XXXXXXXXXX permit the exchange of Capital Securities for Series 3 Shares or Series 5 Shares, as the case may be, upon the occurrence of a XXXXXXXXXX Event, the Debentures will by their terms be automatically and mandatorily converted into XXXXXXXXXX Series 3 Shares (Series A Debenture) or XXXXXXXXXX Series 5 Shares (Series B Debenture) per $XXXXXXXXXX principal amount of the particular Debenture. Immediately after or coincident with such conversion, the Trust will redeem the Capital Securities and the holders of Capital Securities will receive from the Trust in exchange the applicable shares as described in paragraph 18 above.

28. The Debentures will be XXXXXXXXXX unsecured obligations of the Company and will rank equally with all other unsecured and unsubordinated liabilities of the Company, and behind policyholder liabilities. XXXXXXXXXXX, 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 XXXXXXXXXX Event occurs after maturity of any of the Debentures, the Trust will subscribe for, and the Company will issue, Series 3 Shares or Series 5 Shares, as applicable, to satisfy the Trust's obligation to deliver such shares to the holders of the then outstanding Capital Securities.

30. The Series 3 Shares and Series 5 Shares will be identical in all respects except for the effective date of their holder exchange rights. Each will have an issue price of $XXXXXXXXXX per share. Accordingly, XXXXXXXXXX Series 3 Shares or XXXXXXXXXX Series 5 Shares will be issued for each $XXXXXXXXXX of principal amount of the Debenture converted upon the occurrence of a Loss Absorption Event. The Series 3 Shares and Series 5 Shares will carry a fixed, non-cumulative preferential cash dividend at a rate of approximately XXXXXXXXXX% and XXXXXXXXXX% per annum, respectively.

31. The Series 3 Shares and Series 5 Shares will not be redeemable by the Company prior to a date that is XXXXXXXXXX years after the issuance of Capital Securities. On and after that date, the Company may, XXXXXXXXXX, redeem all or any part of the outstanding Series 3 Shares or Series 5 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 Series 3 Share or Series 5 Share so redeemed, the number of which will be determined by dividing the Series 3 Share or Series 5 Share Cash Redemption Price by the greater of (i) $1.00 and (ii) XXXXXXXXXX.

32. On and after the XXXXXXXXXX anniversary of the issuance of Capital Securities, the Company may at any time, XXXXXXXXXX, purchase Series 3 Shares or Series 5 Shares for cancellation in the open market.

33. The Series 3 Shares will be exchangeable at the option of the holder thereof, provided that any XXXXXXXXXX Event which has occurred is not then continuing, on the last day of XXXXXXXXXX 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 Series 3 Shares to the date of exchange, by the greater of (i) $1.00 and (ii) XXXXXXXXXX Any such exchange will be effected by way of the transfer by the holder to Holdco or an affiliate of Holdco of the Series 3 Shares to be so exchanged in consideration for the applicable Holdco common shares. Upon receipt of notice of exercise of the exchange right, the Company may, XXXXXXXXXX, as its option either (i) redeem the Series 3 Shares proposed to be exchanged by the payment of the Series 3 Share Cash Redemption Price, or (ii) require the holder to sell Series 3 Shares proposed to be exchanged to another purchaser or purchasers arranged by the Company for an amount equal to the Series 3 Share Cash Redemption Price. The Series 5 Shares will have the same exchange rights as the Series 3 Shares described above, except that such exchange rights will commence on XXXXXXXXXX.

34. Holders of Series 3 Shares or Series 5 Shares will not have any voting rights except in certain extraordinary circumstances. The Series 3 Shares and Series 5 Shares will rank equally with all other non-cumulative preferred shares of every other series of Class A Shares of the Company and in priority to the Company's common shares and any other shares ranking junior to the Series 3 Shares and Series 5 Shares.

35. Subject to and in accordance with the provisions of Part VI.1, the Company will elect to pay the 40% tax on dividends on the Series 3 Shares and Series 5 Shares.

36. The Company intends to apply to list the Series 3 Shares and Series 5 Shares on the XXXXXXXXXX .

37. The Series 2 Shares and Series 4 Shares will be identical to the Series 3 Shares and Series 5 Shares, respectively, except that they will carry a fixed non-cumulative preferential cash dividend at a rate of XXXXXXXXXX % in the case of the Series 2 Shares and of XXXXXXXXXX % in the case of the Series 4 Shares. The Company also intends to apply to list the Series 2 Shares and Series 4 Shares on the XXXXXXXXXX and will make the election referred to in paragraph 35 above pursuant to Part VI.¹ with respect to the Series 2 Shares and Series 4 Shares.

Purpose of Proposed Transactions

38. The purpose of the proposed transactions is for the Company to XXXXXXXXXX.

39. The purpose of the provisions in the terms of the Capital Securities and Special Securities relating to distributions upon a Regular Distribution Date and a Distribution Diversion Date, and of the inclusion in the terms of the Capital Securities of conditions permitting or requiring the exchange of Capital Securities, and in the terms of the Debenture of conditions permitting or requiring the conversion, into Series 2 Shares or Series 3 Shares and Series 4 Shares or Series 5 Shares of the Company, 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 XXXXXXXXXX the Company will be entitled, pursuant to paragraph 20(1)(c), 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 pursuant to paragraph 9 above.

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

ENDNOTES

¹ Actual rates of return on each of the Capital Securities, the interest rate on the Debentures and the dividend rates on the Series 2 Shares, Series 3 Shares, Series 4 Shares and Series 5 Shares will be determined based on market conditions at the time the Capital Securities are issued. The rates set out in this letter, while representative, are for illustrative purposes only.

¹ The actual reference dates for the redemption price will be determined having regard to market conditions at the time the Debentures are issued.