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.
Principal Issues: 1. Whether an "obligation" per clause 212(1)(b)(iii)(E) 2. Whether "interest" is payable on XXXXXXXXXX bonds denominated in a foreign currency where principal amount may be satisfied by transferring reference shares to the creditor.
Position: Yes / yes
Reasons: XXXXXXXXXX - 1. "Obligation" is a broad term 2. Interest is payable (fixed or floating rate determined before the note is issued) on amount advanced to the taxpayer.
XXXXXXXXXX 2004-005591
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer, with respect to whether certain amounts paid by the taxpayer to non-resident XXXXXXXXXX would be exempt from withholding tax under Part XIII of the Income Tax Act (the "Act") pursuant to clause 212(1)(b)(iii)(E) of the Act.
To the best of your knowledge and that of the above-noted taxpayer, none of the matters raised in this advance income tax ruling request:
? is in an earlier return of the taxpayer or a related person,
? is under objection or appeal by the taxpayer or a related person,
? is before the courts or, if judgment has been issued, the time limit for appeal to a higher court has not expired,
? is being considered by any tax services office or taxation centre of the Canada Revenue Agency (the "CRA") in connection with any income tax return already filed, or
? is the subject of a ruling previously considered by the Rulings Directorate.
Defined Terms
Unless otherwise noted, all references herein to sections or components thereof are references to the Act, as amended, or the Income Tax Regulations (the "Regulations"), as appropriate.
In addition, unless otherwise noted, the following terms have the meanings ascribed to them below:
(a) "ACO" means XXXXXXXXXX.
(b) "Calculation Agent" means XXXXXXXXXX.
(c) "Closing Price" means the price per Reference Share as at the close of trading on the Exchange on the Valuation Date. If the Exchange ceases to list or otherwise include the Reference Shares or if the Calculation Agent is unable to determine an alternative exchange, the Calculation Agent will in good faith determine the Closing Price by reference to the quoted price on any suitable alternative quotation system that may be available or by such other means as it determines appropriate in its absolute discretion.
(d) "XXXXXXXXXX Notes" has the meaning ascribed thereto in paragraph 6(a) below.
(e) "XXXXXXXXXX Pricing Supplement" has the meaning ascribed thereto in paragraph 6 below.
(f) "XXXXXXXXXX Programme" has the meaning ascribed thereto in paragraph 6 below.
(g) "XXXXXXXXXX Prospectus" has the meaning ascribed thereto in paragraph 6 below.
(h) "Equity Risk Hedging" means the hedge transactions that comprise the equity risk component of the hedge transactions described in paragraph 4 below.
(i) "Exchange" means the stock exchange specified in the Note Pricing Supplement. If the Exchange ceases to list or otherwise include the Reference Shares, the Calculation Agent will in good faith determine an alternative exchange or quotation system.
(j) "Foreign Currency" has the meaning ascribed thereto in paragraph 2(a) below.
(k) "Hedge" means any swap, hedge or similar transaction entered into by ACO or any affiliate of ACO at or about the Issue Date relating to the issue of the Note for the purpose of hedging ACO's exposure in relation to the Note.
(l) "Insolvency" means that, by reason of the voluntary or involuntary liquidation, bankruptcy or insolvency of or any analogous proceeding affecting, the Reference Entity, all the Reference Shares are required to be transferred to a trustee, liquidator or other similar official or holders of the Reference Shares become legally prohibited from transferring them.
(m) "Interest Rate" has the meaning ascribed thereto in paragraph 2(c) below.
(n) "Issue Date" has the meaning ascribed thereto in paragraph 2(b) below.
(o) "Issuers" means ACO, XXXXXXXXXX.
(p) "Maturity Date" has the meaning ascribed thereto in paragraph 2(b) below.
(q) "Money Market Risk Hedging" means the hedge transactions that comprise the money market risk component of the hedge transactions described in paragraph 4 below.
(r) "Nationalization" means that all the Reference Shares or all the assets or substantially all the assets of the Reference Entity are nationalized, expropriated or are otherwise required to be transferred to any governmental agency, authority or entity.
(s) "Note" has the meaning ascribed thereto in paragraph 2 below.
(t) "Note Pricing Supplement" has the meaning ascribed thereto in paragraph 6 below.
(u) "Noteholder" means the holder of the Note from time to time. ACO and the purchasers of the Notes will deal at arm's length for purposes of the Act.
(v) "Principal Amount" has the meaning ascribed thereto in paragraph 2(a) below.
(w) "Redemption Amount" means the Principal Amount of the Note less any costs of terminating, or unwinding, or otherwise closing out or entering into any replacement Hedge incurred by ACO.
(x) "Reference Entity" means an entity dealing at arm's length with ACO that is a non-resident of Canada for purposes of the Act and that is specified in the Note Pricing Supplement and any Successors (as defined in the Note Pricing Supplement).
(y) "Reference Shares" means a fixed number of fully paid, ordinary shares of the Reference Entity. The Reference Shares currently trade on the Exchange.
(z) "Settlement Disruption Event" means an event beyond the control of ACO and the Transfer Agent and as a result of which the Clearance System (as defined in the Note Pricing Supplement) cannot receive or clear the transfer of securities of a type similar to the Reference Shares.
(aa) "Strike Price" means a fixed dollar amount based on the market price of the Reference Shares on the Trade Date. It is expected that the Strike Price will be less than the market price of the Reference Shares on the Trade Date and is likely to be approximately XXXXXXXXXX% of such market price.
(bb) "Trade Date" means a date prior to the Issue Date and within XXXXXXXXXX of the Issue Date.
(cc) "Transfer Agent" means XXXXXXXXXX.
(dd) "Valuation Date" means a date prior to the Maturity Date and within XXXXXXXXXX of the Maturity Date. The Valuation Date is subject to adjustment in the circumstances that it is not an Exchange Business Date and/or there is a Market Disruption Event and/or a Trading Disruption Event, all as defined in the Pricing Supplement.
Facts
1. ACO (taxpayer ID Number: XXXXXXXXXX ) is a XXXXXXXXXX. XXXXXXXXXX ACO is a "taxable Canadian corporation" as that term is defined in subsection 89(1) XXXXXXXXXX. The tax returns of ACO are filed at the XXXXXXXXXX Tax Services Office of the Canada Revenue Agency. XXXXXXXXXX.
Proposed Transactions
2. ACO proposes to issue XXXXXXXXXX note (the "Note"). The terms and conditions of the Note are as follows:
(a) The principal amount of the Note (the "Principal Amount") will be denominated in a currency other than Canadian currency (the "Foreign Currency") and the Note will be issued for an amount equal to the Principal Amount on the Issue Date. All payments made under or in respect of the Note will be in the Foreign Currency.
(b) It is presently anticipated that the Note will mature on a date (the "Maturity Date") approximately XXXXXXXXXX after the date on which the Note is issued (the "Issue Date"), and will not be redeemable or cashable prior to maturity, except in the limited circumstances described below.
(c) The Note will bear interest at a fixed or floating rate per annum (the "Interest Rate") and such interest will be payable on the Maturity Date. The fixed rate or the basis for computing the floating rate will be determined prior to the Issue Date. It is anticipated that the Interest Rate will be greater than that applicable to XXXXXXXXXX.
(d) On the Maturity Date:
(i) if the Closing Price of the Reference Shares is greater than or equal to the Strike Price, ACO will be obligated to repay the Note in cash for an amount equal to the Principal Amount of the Note; and
(ii) if the Closing Price of the Reference Shares is less than the Strike Price, ACO will be obligated to repay the Note by physical delivery of the Reference Shares.
(e) In the circumstances described in section 2(d)(ii) above, the number of Reference Shares to be delivered by ACO to the Noteholder is subject to adjustment for any stock splits or other capital reorganizations, and ACO is obligated to transfer to the Noteholder all of its right, title and interest in the Reference Shares free and clear of any and all liens or charges and free of any transfer taxes or duties.
(f) In certain circumstances, where ACO would otherwise be required to redeem the Note by physical delivery of the Reference Shares, ACO is instead required to redeem the Note by paying cash in an amount equal to the market price or fair market value of the Reference Shares. These include circumstances in which:
(i) there is a Settlement Disruption Event on the Maturity Date and such event continues for a specified number of days thereafter and the Reference Shares cannot be delivered in any other commercially reasonable manner (as determined by the Calculation Agent);
(ii) in the determination of the Transfer Agent and the Calculation Agent, delivery of the Reference Shares is impracticable or illegal for any reason;
(iii) there has been a Nationalization or Insolvency in relation to the Reference Shares, ACO did not elect to redeem the Notes as described in paragraph 2(h) below, and the Nationalization or Insolvency is continuing as of the Valuation Date.
(g) In the event that the market value of the Reference Shares at the Maturity Date is less than the Principal Amount of the Note, there is no obligation on the Issuer, the Calculation Agent or the Transfer Agent to make any additional payment to the Noteholder.
(h) ACO will have the right to redeem the Notes, in whole but not in part, if a Nationalization or Insolvency occurs in relation to the Reference Shares at any time from and including the Issue Date to but excluding the Valuation Date. ACO will also have the right to redeem the Note, in whole but not in part, prior to the Maturity Date on the occurrence of a tax event as described in the XXXXXXXXXX Prospectus, and the Note may become due and owing prior to the Maturity Date on an event of default as described in the XXXXXXXXXX Prospectus. In each case, the redemption price or amount owing is equal to the Redemption Amount.
(i) The Note will be issued in bearer form and will not be listed for trading on any stock or other exchanges.
(j) There is no obligation under the Pricing Supplement for ACO to own any of the Reference Shares at any time during the term of the Note or at any other time (other than to deliver such shares in circumstances where it is so required to deliver such shares in accordance with and pursuant to the terms of the Note). If ACO does own Reference Shares, it retains full voting rights in respect of such shares and does not have to pay the Noteholder any compensation payments in respect of dividends on the shares.
3. The Note will be issued in the course of the business carried on by ACO XXXXXXXXXX. In particular, the proceeds of issue of the Note will be used in the business carried on by XXXXXXXXXX, the Note will be shown as a liability of XXXXXXXXXX for financial statement purposes and the interest on the Note will be deducted in computing the income of XXXXXXXXXX for financial statement purposes.
4. ACO and/or its affiliates may enter into hedge transactions in relation to ACO's exposure under the Note. Any such hedge transactions will be comprised of two separate components, an equity risk component and a money market risk component.
(a) In relation to the Equity Risk Hedging:
(i) ACO and/or its affiliates may enter into hedge transactions prior to the Issue Date, concurrent with the issue of the Note and during the term of the Note.
(ii) The hedge transactions will generally involve purchases or sales of shares or other securities of the Reference Entity and/or listed or over-the-counter options and other derivatives.
(iii) It is expected that, on the Trade Date, ACO and/or its affiliates will purchase shares of the Reference Entity that are identical to the Reference Shares and which comprise approximately XXXXXXXXXX to XXXXXXXXXX% of the Reference Shares.
(iv) ACO and/or its affiliates will engage in dynamic hedging during the term of the Note, meaning that they will purchase and/or sell shares or other securities of the Reference Entity (and/or engage in analogous transactions using listed or over-the-counter options and other derivatives) based on the market price of the Reference Shares. Typically, as the market price of the Reference Shares falls, ACO and/or its affiliates will acquire more shares or other securities of the Reference Entity (and/or engage in analogous transactions using listed or over-the-counter options and other derivatives). As the market price of the Reference Shares increases, ACO and/or its affiliates will make sales of shares or other securities of the Reference Entity (and/or engage in analogous transactions using listed or over-the-counter options and other derivatives).
(v) It is expected that the number of hedge transactions entered into by ACO and/or its affiliates will increase with the volatility in the market price of the Reference Shares.
(vi) ACO and/or its affiliates expect to generate profits through XXXXXXXXXX. These profits are expected to be at least equal to the amount, if any, by which the amount of the interest payable on the Note exceeds the interest that would be payable on XXXXXXXXXX.
(b) In relation to the Money Market Risk Hedging, ACO and/or its affiliates will enter into money market trades (including derivatives such as interest rate swaps) in respect of the amount received by ACO on the issue of the Note.
5. ACO currently intends to undertake the Equity Risk Hedging through XXXXXXXXXX, and its Money Market Risk Hedging through XXXXXXXXXX.
6. The Note will be issued pursuant to a pricing supplement (the "Note Pricing Supplement"), which is supplemental to the prospectus (the "XXXXXXXXXX Prospectus") dated XXXXXXXXXX issued in relation to the U.S.$XXXXXXXXXX Program (the "XXXXXXXXXX Programme") of the Issuers. Pursuant to the XXXXXXXXXX Prospectus, the specific terms of each Series of XXXXXXXXXX Notes will be set forth in the Series of XXXXXXXXXX Notes and in a pricing supplement (an "XXXXXXXXXX Pricing Supplement") to the XXXXXXXXXX Prospectus. The XXXXXXXXXX Prospectus provides that the XXXXXXXXXX Prospectus is to be read and construed in conjunction with any relevant XXXXXXXXXX Pricing Supplement. The relevant XXXXXXXXXX Pricing Supplement in respect of the Note is the Note Pricing Supplement. Under the XXXXXXXXXX Programme:
(a) The Issuers may issue XXXXXXXXXX Notes and ACO may issue XXXXXXXXXX Notes in one or more series ("XXXXXXXXXX Notes").
(b) The XXXXXXXXXX Notes of a series may be designated as Fixed Rate Notes, Floating Rate Notes, Zero Coupon Notes, High Interest Notes, Low Interest Notes, Step-Up Notes, Step-Down Notes, Partly-paid Notes, Instalment Notes or Credit-linked Notes as shown in the XXXXXXXXXX Notes, and Fixed Redemption Amount Notes or Variable Redemption Amount Notes depending on the Redemption Basis shown in the XXXXXXXXXX Notes.
(c) ACO may issue XXXXXXXXXX Notes through XXXXXXXXXX.
(d) The principal of and interest on XXXXXXXXXX Notes issued by the Issuers (other than ACO) will be guaranteed by ACO.
(e) ACO or a subsidiary of ACO may in certain circumstances and subject to meeting certain conditions be substituted as the borrower in place of the Issuer where the Issuer is an Issuer other than ACO. If the Issuer is ACO, it may change the XXXXXXXXXX.
(f) Not more than U.S.$XXXXXXXXXX of XXXXXXXXXX Notes can be outstanding at any one time.
(g) The minimum term of an XXXXXXXXXX Note is XXXXXXXXXX.
(h) The XXXXXXXXXX Notes may be issued at par or at a discount or premium to par and Partly-paid Notes may be issued.
(i) The XXXXXXXXXX Notes and applicable pricing supplement indicate either that the XXXXXXXXXX Notes cannot be redeemed prior to their stated maturity (other than in instalments or for tax reasons) or that the XXXXXXXXXX Notes will be redeemable at the option of the Issuer and/or the holder at a date or dates and at a price or prices set forth in the XXXXXXXXXX Notes and applicable pricing supplement.
(j) The denomination of the Notes is to be indicated in the XXXXXXXXXX Notes and applicable pricing supplement.
(k) All payments under the XXXXXXXXXX Notes are to be made without deduction for or on account of withholding taxes imposed in Canada and other relevant jurisdictions and the XXXXXXXXXX Notes are subject to redemption prior to maturity if the Issuer is required to pay additional amounts on account of the imposition of such taxes.
(l) XXXXXXXXXX Notes issued by ACO and the obligations of ACO under guarantees of XXXXXXXXXX Notes rank pari passu with XXXXXXXXXX of ACO. XXXXXXXXXX Notes issued by XXXXXXXXXX will be paid without the necessity of being first presented for payment XXXXXXXXXX. Notes issued by the Issuers other than ACO will be unsecured and unsubordinated debt obligations of the particular Issuer and will rank pari passu with all other outstanding unsecured and unsubordinated debt obligations of the particular Issuer.
(m) Pursuant to the XXXXXXXXXX Prospectus, XXXXXXXXXX Notes may be listed on an exchange. However, not all series of XXXXXXXXXX Notes will be listed on an exchange.
(n) An event of default under the XXXXXXXXXX Notes occurs only if the Issuer defaults in the payment of any interest due on the XXXXXXXXXX Notes and such default continues for XXXXXXXXXX or if the Issuer or ACO (if the guarantor) shall become insolvent or bankrupt or if a liquidator, receiver or receiver and manager or examiner is appointed.
(o) The XXXXXXXXXX Notes may be issued in bearer form only, in bearer form exchangeable for Registered Notes or in registered form only.
(p) The net proceeds from each issue of XXXXXXXXXX Notes will be added to the general funds of the relevant Issuer.
Terms used in this paragraph and not otherwise defined herein have the meanings ascribed to them in the XXXXXXXXXX Prospectus.
Purpose of the Proposed Transactions
ACO wishes to XXXXXXXXXX expand XXXXXXXXXX by offering the Note (and similar securities), XXXXXXXXXX to non-residents of Canada. XXXXXXXXXX are interested in purchasing the Note to earn the interest payable on the Note, which, as stated earlier, is expected to be greater than that applicable to XXXXXXXXXX.
Ruling Given
Provided that the preceding statements, including the statements made under the heading "Defined Terms", constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, and subject to the comments set out below, the following ruling is given:
All amounts that ACO pays or credits to or for the benefit of a Noteholder under or pursuant to the Note as, on account or in lieu of payment of, or in satisfaction of, interest will be exempt from withholding tax under subsection 212(1) by virtue of the exemption in clause 212(1)(b)(iii)(E) and, accordingly, ACO will not be required to deduct or withhold any amount of tax otherwise payable under subsection 212(1) from any such amounts.
The above ruling is given subject to the general limitation and qualifications set out in information Circular 70-6R5 issued by the CRA on May 17, 2002, and is binding on the CRA provided the proposed transactions are completed by XXXXXXXXXX.
This ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments to the Act. Additionally, nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or accepted any tax consequences of the proposed transactions or related transactions or events that are not described in the ruling given.
Caveat
With respect to the application of clause 212(1)(b)(iii)(E), nothing in this Ruling Letter should be construed as implying that we have reviewed or determined whether any portion of any amount paid or credited to or for the benefit of a Noteholder under or pursuant to the Note as, on account or in lieu of payment of, or in satisfaction of, interest will be deductible by ACO for purposes of computing its income from a business carried on outside Canada for purposes of Part I of the Act.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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