2002 Ruling 2002-0161803 - DPS TERM PREFERRED SHARES EXCEPTION

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:

Request for minor changes to Ruling 2000-005476

Position TAKEN:

Add amendments to Ruling

Reasons FOR POSITION TAKEN:

Most DPS Ruling contain these proposed transactions

XXXXXXXXXX 		2002-016180

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling 2000-005476 (the "Ruling")
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, in which you request certain amendments to the "Ruling".

The Ruling is amended as follows:

1. In subparagraph 46(b) of the Ruling, the following words are added at the end of the subparagraph immediately after the sentence ending with "...XXXXXXXXXX;"

"(for greater certainty, the interest rate applied by the Bank to debts of XXXXXXXXXX may be either fixed or floating and may be convertible from fixed to floating or, vice versa during the term of the loan)"

2. In subparagraph 46(c) of the Ruling, the following words are added after the sentence ending with "...(the "Redemption Amount);"

"...and, in any event, redeemable three business days prior to the fifth anniversary of their issuance;"

3. In Subparagraph 46(e) of the Ruling, the words "...after five years from their date of issue;..." are deleted and replaced by the words "...three business days prior to the fifth anniversary of their issuance;..."

4. Subparagraph 46(h) is added immediately following subparagraph 46(g) of the Ruling as follows:

"(h) the preferential cumulative dividends referred to in (b) may be increased upon the occurrence of an "Adverse Yield Event" as defined in subparagraph 53(c) below, by the amount of any "Rate Difference" as defined in subparagraph 53(b) below;"

5. The first sentence in Paragraph 48 of the Ruling is amended to delete the amount of $XXXXXXXXXX and to replace it with the amount of "$XXXXXXXXXX". Paragraph 48 is further amended to add after the word "...Debtor ..." in the fourth line, the following: "(the "Debtor's Guarantee"). Under the Debtor's Guarantee, the Debtor will also guarantee to the Bank and the subsequent holders of Distress Preferred Shares the performance by Newco of the obligations of Newco arising from the Distress Preferred Share refinancing. The Debtor will pledge its common shares of Newco to the Bank (assignable to other holders of the Distress Preferred Shares) as security for the Debtor's Guarantee and for the Debtor's other obligations in respect of the Distress Preferred Shares refinancing described herein (the "Share Pledge Agreement")."

6. Paragraph 51 is amended as follows:

The words "...the third business day preceding..." is added immediately before the words "...the XXXXXXXXXX anniversary of the issuance..." and the words "...plus any accrued but unpaid dividends..." after the words "...Redemption Amount..."are deleted.

7. Paragraph 52 is amended as follows:

The words "...no later than the third business day preceding" are added immediately after the word "...event..." in line 1. The word "on" in line 2 is deleted.

8. Paragraph 53 is amended as follows:

"(a)" is inserted at the beginning of the current paragraph.

9. The following is added at the end of new subparagraph 53(a):

"(b) The Debtor will agree with the Bank (and any subsequent holder(s) of Distress Preferred Shares) that, in the event that there is an "Adverse Yield Event" (as defined in subparagraph 53(c) below ), it will pay to a holder of Distress Preferred Shares of Newco, such additional amount(s) (the "Rate Difference") as is necessary, so that, after taking in to account the full effect on the holder of the Distress Preferred Shares of the Adverse Yield Event, any payments previously received by the holder of the Distress Preferred Shares in respect of the applicable Adverse Yield Event and any income taxes payable by the holder on any such additional amount(s), such holder of the Distress Preferred Shares shall have received the same after tax income it would have received in the absence of an Adverse Yield Event on the assumption that such holder pays tax at the highest federal and provincial rate and has as its sole asset the Distress Preferred Shares and revenues, costs and expenses relating only to the Distress Preferred Shares. Amounts payable under this indemnity will be net of any amount(s) receivable by a holder of Distress Preferred Shares as an increased dividend under the terms and conditions of such shares (as described in subparagraph 46(h)). However, the obligation of the Debtor or Newco to a subsequent holder of Distress Preferred Shares (other than the Bank) shall not be any greater than it would have been if the Bank had continued to hold the Distress Preferred Shares."

10. The following is added at the end of new subparagraph 53(b) above:

"(c) "Adverse Yield Event" means:

(i) any new legislation or any change in any applicable existing or new legislation (and for these purposes "legislation" shall included any order-in-council, regulation, rule, guideline, treaty or directive (whether or not having the force of law) of Canada or any province of Canada (other than any such change which results in a change in any rate of tax (including surtax) applicable to financial institutions or corporations generally), any announcement by government authority, entity or agency (including any central bank or other fiscal or monetary authority or agency) of Canada or any province of Canada regarding the enactment of such new legislation or the making of any such change, any change in the interpretation or administration of any applicable legislation by any governmental authority, entity or agency (including any central bank or other fiscal or monetary authority or agency) of Canada or any province of Canada, or any notice from the CCRA that the income tax ruling in respect of the proposed transactions has ceased to be applicable in accordance with its terms for any reason whatever;

(ii) any judgment or order of a court or competent jurisdiction in Canada or any province of Canada, in any matter or case, whether or not an appeal has been instituted and notwithstanding the existence of any right of appeal;

(iii) any change in the status of the Debtor or Newco (including, without limitation, the loss of its status as a "taxable Canadian corporation" as that term is defined in the Act) under any applicable legislation of Canada or a province of Canada; or

(iv) any assessment or reassessment of any person for any Canadian federal or provincial tax or both,

which, in the sole opinion of any holder of Distress Preferred Shares, has, or may reasonably be expected to have, one or more of the following effects:

(v) results in dividends, deemed dividends or distributions on the Distress Preferred Shares being subject to tax;

(vi) precludes such holder from deducting interest, costs or expenses incurred directly or indirectly as a result of the acquisition or holding of the Distress Preferred Shares;

(vii) otherwise decreases the holder's after-tax return or increases the holder's after-tax cost or imposes interest or penalty on amounts received by the holder;

(viii) imposes or modifies regulatory requirements with adverse effects on the holder's effective return;

(ix) makes it unlawful or impossible for the holder to continue to hold the Distress Preferred Shares; or

(x) results in any amount being imputed to the holder as a benefit in respect of the Distress Preferred Shares."

11. The following is added immediately following new subparagraph 53(c):

"(d) In addition to the Support Agreement, Development Co, the Debtor and the Bank will enter a separate support agreement (the "Development Co Support Agreement") under which Development Co will agree to advance, by way of non-interest bearing inter-company advances, all of its excess cash flow from operations derived from the sources of income in existence at the time of the issuance of the Distress Preferred Shares. Development Co will also agree to guarantee to the Bank the obligations of the Debtor and Newco under the Distress Preferred Share refinancing (the "Development Co Guarantee"). The Development Co Guarantee will be secured by a general assignment of book debts relating to the operations of Development Co in existence at the time of the Distress Preferred Share issuance (the "Development Co Security"). The Bank will, however, be limited in its recourse under the Development Co Guarantee and the Development Co Security to the amount of the excess cash flow of Development Co from its operations derived from the sources of income in existence at the time of the issuance of the Distress Preferred Shares."

We confirm that the above-noted amendments will not affect the rulings given in the Ruling dated XXXXXXXXXX, 2002 and the extension to the Ruling dated XXXXXXXXXX, 2002 (2002-015423). The rulings given will continue to be binding on the CCRA as indicated therein.

Yours truly,

XXXXXXXXXX
For Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch