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:
Is a failure to make an offer if there is an Asset Sale over $XXXXXXXXXX an acceptable event of default?
Position TAKEN:
A failure to make an offer to repurchase notes out of proceeds in the event of an asset sale is an acceptable event of default.
Reasons FOR POSITION TAKEN:
XXXXXXXXXX (962578)
Not contrived - commercial reality - beyond control of lender.
XXXXXXXXXX 2002-016727
XXXXXXXXXX, 2002
Dear XXXXXXXXXX,
Re: Advance income tax ruling - XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above noted corporation. We also acknowledge the additional information in your letters of XXXXXXXXXX.
To the best of your knowledge, and that of A Co, none of the issues involved in this ruling as they apply specifically to A Co and its subsidiaries herein:
(i) is in an earlier return of A Co or a related person related to A Co;
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of A Co or a related person;
(iii) is under objection by A Co or a related person;
(iv) is before the courts; or if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) is the subject of a previously issued ruling.
In this letter, the following terms have the meanings specified:
"A Co" refers to XXXXXXXXXX;
"Act" means the Income Tax Act, R.S. C. 1985 (5th supp) c.1, as amended to the date hereof, and unless otherwise stated, every reference to a Part, section, subsection, paragraph or subparagraph is a reference to the specified Part or provision of the Act;
"B Co" refers to XXXXXXXXXX.
"C Co" refers to XXXXXXXXXX.
XXXXXXXXXX
Our understanding of the relevant facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. A Co, carrying on business as "XXXXXXXXXX", is one of Canada's leading XXXXXXXXXX-businesses, formed by the merger of the businesses of A Co and B Co XXXXXXXXXX.
B Co and its wholly-owned subsidiary, C Co, were amalgamated to continue under the name C Co.
As a result, C Co is now a wholly-owned subsidiary of A Co. XXXXXXXXXX.
2. A Co is a corporation governed by the XXXXXXXXXX A Co is a "taxable Canadian corporation" within the meaning of subsection 89(1) of the Act.
3. A Co's business number is XXXXXXXXXX. A Co files its tax return at the XXXXXXXXXX Tax Services Office. The administrative offices of A Co are located at XXXXXXXXXX.
4. XXXXXXXXXX.
5. The authorized capital of A Co consists of an unlimited number of Common Shares and an unlimited number of preferred shares issuable in series, of which XXXXXXXXXX Common Shares and XXXXXXXXXX shares are issued and outstanding as at XXXXXXXXXX. The Common Shares are listed on XXXXXXXXXX Stock Exchange. XXXXXXXXXX.
6. In conjunction with the merger described in paragraph 1 above, A Co obtained new credit facilities (the "Existing Credit Facilities") from XXXXXXXXXX Canadian chartered banks (the "Canadian Bank Lenders"). The Existing Credit Facilities XXXXXXXXXX consist of the following:
(i) a $XXXXXXXXXX revolving credit facility provided by all XXXXXXXXXX Canadian Bank Lenders (the "Revolving Credit Facility");
(ii) a $XXXXXXXXXX non-revolving term credit facility with one of the Canadian Bank Lenders (the "Term Credit Facility"); and
(iii) a $XXXXXXXXXX temporary bridge facility provided by one of the Canadian Bank Lenders (the "Bridge Facility").
The Existing Credit Facilities were guaranteed by XXXXXXXXXX A Co's XXXXXXXXXX material wholly-owned subsidiaries (the "Guarantors") and secured against all of the property and assets of A Co and the Guarantors.
7. The Revolving Credit Facility has been used for the purpose of financing accounts receivable and inventory, refinancing existing revolving credit facilities of XXXXXXXXXX, and for general corporate purposes.
8. The Term Credit Facility was used to re-finance the bank term debt of XXXXXXXXXX. It provides for scheduled quarterly principal repayments of $XXXXXXXXXX, with the balance due on XXXXXXXXXX . In accordance with the terms of the Existing Credit Facilities, an aggregate of $XXXXXXXXXX has been applied in prepayment of the Term Credit Facility from an XXXXXXXXXX.
9. The Bridge Facility, which was implemented in XXXXXXXXXX was a revolving credit and expired on XXXXXXXXXX.
10. The Existing Credit Facilities contain terms and conditions customary to other credit facilities of a similar size and type. In particular, the Existing Credit Facilities contain a covenant requiring A Co to meet certain consolidated financial tests, restricting A Co's and the Guarantors' ability to grant security interests, dispose of assets, change the nature of their respective businesses or enter into business combinations, and requiring that (subject to specified exclusions and thresholds) the net after-tax proceeds from certain asset dispositions be applied to reduce A Co's obligations under the Term Credit Facility and the net after-tax proceeds from certain other specified asset dispositions be applied to reduce proportionately the Term Credit Facility and the XXXXXXXXXX Notes described in paragraph 12 below. This includes any proceeds arising from the disposition of assets XXXXXXXXXX as described in paragraphs 15 and 16 below.
11. A Co has obtained a commitment for a syndicated credit facility to replace the Existing Credit Facilities, the provisions of which are expected to be substantially similar to the Existing Credit Facilities (the "Syndicated Credit Facilities") except that the Revolving Credit Facility will be in the principal amount of $XXXXXXXXXX and the Term Credit Facility will be in the principal amount of $XXXXXXXXXX.
12. As at XXXXXXXXXX, B Co had outstanding approximately $XXXXXXXXXX principal amount of notes XXXXXXXXXX Notes XXXXXXXXXX. The XXXXXXXXXX Notes were issued under a trust indenture (the "Original Indenture") pursuant to which B Co was required to observe a number of covenants, including specified financial coverage ratios. Under the terms of the Original Indenture, B Co required the consent of the holders of the XXXXXXXXXX Notes (the "Noteholders") to XXXXXXXXXX. The Noteholders granted their consent XXXXXXXXXX, and agreed to certain waivers, conditional upon several events occurring, including A Co and B Co entering into an amended and restated trust indenture (the "Restated Indenture"). The Restated Indenture dated as of XXXXXXXXXX provides that the former obligations of B Co (and then, after the amalgamation, C Co) in respect of the XXXXXXXXXX Notes become joint and several obligations of A Co and C Co. The Restated Indenture contains financial and other covenants and events of default substantially similar to those in the Existing Credit Facilities except that the proportion of the net after-tax proceeds to be applied to repayment of XXXXXXXXXX Notes is used to make an offer to the Noteholders to redeem their XXXXXXXXXX Notes. To the extent that that offer is not accepted, excess net after-tax proceeds are available for A Co's general corporate purposes. An aggregate of $XXXXXXXXXX of the net after-tax proceeds has been applied to redeem XXXXXXXXXX Notes. The obligations of A Co and C Co under the Restated Indenture are secured against all of the property and assets of A Co, C Co and the other Guarantors.
13. A Co, C Co, the Canadian Bank Lenders and the trustee under the Restated Indenture have entered into an interlender agreement to establish the priorities of the respective security held by the Canadian Bank Lenders and the Noteholders.
14. XXXXXXXXXX.
15. XXXXXXXXXX.
16. XXXXXXXXXX.
Proposed Transactions
17. Pursuant to a trust indenture (the "Trust Indenture"), A Co will issue approximately $XXXXXXXXXX of secured notes (the "Secured Notes"), at a fixed interest rate to be determined prior to the sale of the Secured Notes, to one or more non-resident persons on a private placement basis. It is anticipated that the offering of the Secured Notes will close on XXXXXXXXXX and will mature on XXXXXXXXXX. The Guarantors will guarantee the obligations of A Co under the Trust Indenture. A Co and the Guarantors will secure the obligations under the Trust Indenture by charges over all of their property and assets, including fixed charges over specified real property assets.
18 A Co will use the proceeds from the issuance of the Secured Notes to refinance a portion of the Existing Credit Facilities. It is expected that various covenants and events of default in the Secured Notes and the Trust Indenture will be consistent and substantially similar to those in the Syndicated Credit Facilities and the Restated Indenture.
19. Contemporaneously with the issue of the Secured Notes, A Co and the Guarantors will grant fixed charge security over the real property referred to in paragraph 16 that has not been sold to secure their obligations under the Restated Indenture and the Syndicated Credit Facilities. At the same time, the agent for the lenders under the Syndicated Credit Facilities and the trustees under the Trust Indenture and the Restated Indenture will enter into an interlender agreement to establish the relative priorities of the security held by them.
20. The terms of the Trust Indenture will provide that the principal amount of the Secured Notes will be repayable in monthly instalments over the term of the Secured Notes but the required repayments on or before the XXXXXXXXXX anniversary of the issue date of the Secured Notes will be less than XXXXXXXXXX% of initial principal amount of the Secured Notes.
21. The Trust Indenture will also provide that where A Co has made an Asset Sale (as described in paragraph 22 below) the net after-tax proceeds thereof where an Asset Sale exceeds $XXXXXXXXXX, will be allocated among the Term Credit Facility under the Syndicated Credit Facilities, the XXXXXXXXXX Notes and the Secured Notes in proportion to their respective principal amounts and A Co will be required to make an offer (the "Asset Sale Offer") in an amount equal to the portion of the net after-tax proceeds allocated to the Secured Notes ("Net Proceeds") to all holders of Secured Notes to purchase Secured Notes for cash in an amount equal to the face amount of the Secured Notes to be repurchased plus accrued interest, if any, plus the Make Whole Amount. Each Noteholder will receive an offer in an amount equal to such Noteholder's pro rata share of the Net Proceeds based on the principal amount of such Noteholder's Secured Notes as a percentage of the principal amount of all outstanding Secured Notes. The Make Whole Amount for a Secured Note is the difference (if positive) between (i) the net present value of scheduled principal and interest payments pertaining to the principal amount of the Secured Notes to be repurchased, discounted at the yield on U.S. treasury securities having a maturity equal to the remaining weighted average life of the Secured Note plus XXXXXXXXXX basis points, and (ii) the principal amount of the Secured Note to be repurchased.
22. "Asset Sale" is defined in the Trust Indenture and will include XXXXXXXXXX.
23. While undertaking an Asset Sale will not be an event of default under the terms of the Trust Indenture, the failure of A Co to make an Asset Sale Offer to repurchase Secured Notes in an amount equal to the Net Proceeds from an Asset Sale in accordance with the Asset Sale Offer provisions will be a listed event of default with respect to the Secured Notes. The failure of A Co to make an Insurance or Expropriation Proceeds Offer in accordance with the Trust Indenture will be an event of default with respect to the Secured Notes.
24. The Trust Indenture will also provide that in the event that A Co receives proceeds of insurance covering loss of or damage to property or other compensatory amounts in respect of the expropriation or other forced disposition or sale of property and assets ("Insurance or Expropriation Proceeds"), that exceed $XXXXXXXXXX (net of any costs of disposition and taxes), A Co will be required to obtain Majority Credit Approval (generally defined as approval of two of the three lending groups) to use such proceeds to rebuild or replace the damaged or expropriated property. If such approval is not obtained then, in circumstances in which the damaged or expropriated property is a Current Asset (as defined in the interlender agreement), the Insurance or Expropriation Proceeds will be used to pay the Revolving Credit Facility under the Syndicated Credit Facilities. In the circumstances in which the damaged or expropriated property is not a Current Asset or if the Insurance or Expropriation Proceeds from Current Assets exceed the amount necessary to fully repay the Revolving Credit Facility, the Insurance or Expropriation proceeds will be allocated among the Term Credit Facility, the XXXXXXXXXX Notes and the Secured Notes in proportion to their respective principal amounts. The proportion thereof allocated to the Secured Notes will be required to be used to make an Insurance or Expropriation Offer on the basis described in Section XXXXXXXXXX of the Trust Indenture. Provided the Insurance or Expropriation Proceeds (net of any disposition costs and taxes) do not exceed $XXXXXXXXXX, A Co and its subsidiaries will be able to use such Insurance or Expropriation Proceeds (net of any cost of disposition and taxes) to rebuild, replace or repair the destroyed, damaged or expropriated property or to apply the Insurance or Expropriation Proceeds to such other general corporate purposes as A Co shall determine.
25. The Trust Indenture will contain provisions comparable to those described in paragraph 10. In addition, a change of control of A Co, as defined in the Trust Indenture, will require A Co to make an offer to repurchase Notes for their principal amount plus accrued interest plus the Make Whole Amount. A change of control will not be an event of default but the failure of A Co to make an offer to purchase Secured Notes following a change of control will be a listed event of default.
Purpose of Proposed Transactions
26. The purpose of the proposed transactions is to permit A Co and C Co to refinance a portion of the Existing Credit Facilities and certain other bank debt on a basis that does not result in the imposition of withholding tax.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is as follows:
A. The requirement of A Co, pursuant to the terms of the Trust Indenture, to make an Asset Sale Offer to repurchase Secured Notes out of the Net Proceeds in the event of an Asset Sale to the extent such proceeds are allocated to the Secured Notes, as described in paragraph 21, and the inclusion of the failure to make an Asset Sale Offer as a listed event of default under the terms of the Trust Indenture, will not, in and by themselves, preclude the application of the exemption from Canadian withholding tax, in subparagraph 212(1)(b)(vii) of the Act, to interest paid by A Co to holders of Secured Notes who, for purposes of the Act, are non-residents of Canada and deal at arm's length with A Co.
B The requirement of A Co, pursuant to the terms of the Trust Indenture, to make an Insurance or Expropriation Offer to repurchase Secured Notes out of the Insurance or Expropriation Proceeds to the extent such proceeds are allocated to the Secured Notes as described in paragraph 24, and the inclusion of the failure to make an Insurance or Expropriation Offer as a listed event of default under the terms of the Trust Indenture, will not, in and by themselves, preclude the application of the exemption from Canadian withholding tax, in subparagraph 212(1)(b)(vii) of the Act, to interest paid by A Co to holders of Secured Notes who, for purposes of the Act, are non-residents of Canada and deal at arm's length with A Co.
These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5, dated May 17, 2002, and are binding on the CCRA provided the Secured Notes are issued before XXXXXXXXXX.
These rulings are based on the Act as it currently reads and do not take into account any future amendments, whether currently proposed or not, to the Act.
Yours truly,
XXXXXXXXXX
for Director,
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2002
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2002
Email this Content