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. Is interest on the Note the proceeds of which are used for the purpose of earning income from a business deductible under 20(1)(c)? 2. Is a discount paid in satisfaction of the principal amount deductible under 20(1)(f)?
Position: 1. Yes 2. Yes
Reasons: use of the funds is capital. Shallow Discount may apply
XXXXXXXXXX 2004-007101
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling - XXXXXXXXXX
This is in reply to your letters of XXXXXXXXXX, wherein you request an Advance Income Tax Ruling on behalf of the XXXXXXXXXX ("A Co")
To the best of your knowledge, and that of A Co, none of the issues involved in this ruling contained herein is:
(i) in an earlier return of A Co or of a person related to A Co;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of A Co or of a related person;
(iii) under objection by A Co or by a related person;
(iv) before the courts; or if a judgment has been issued, the time limit for appeal to a higher court has expired; or
(v) the subject of a previously issued ruling by the Income Tax Rulings Directorate.
DEFINITIONS
"A Co" means XXXXXXXXXX;
"Act" means the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended;
XXXXXXXXXX;
XXXXXXXXXX
"Benchmark Shares" means XXXXXXXXXX;
"Canadian GAAP" means Canadian generally accepted accounting principles;
XXXXXXXXXX;
XXXXXXXXXX;
"Conversion Event" means the occurrence of any of XXXXXXXXXX;
"Conversion Ratio" means that number of Preferred Shares determined by the quotient A/B where A is equal to the aggregate of (i) the Face Value of the Notes and (ii) the accrued but unpaid interest thereon, and B is the Market Price;
"CYP Redemption Price" means the greater of (i) the Face value and (ii) XXXXXXXXXX, together in each case with accrued and unpaid interest thereon to the redemption date;
"Deferred Interest" means interest on the Notes the payment of which has been deferred as described in paragraph 9;
"Face Value" has the meaning set out in paragraph 5;
XXXXXXXXXX;
"Interest Deferral Event" shall occur when, on any day that A Co reports financial results for a financial quarter, A Co does not report cumulative consolidated net income (as determined in accordance with Canadian GAAP) for the immediately preceding four quarters and during the immediately preceding financial quarter, A Co fails to declare regular dividends on XXXXXXXXXX;
"Interest Deferral Period" has the meaning set out in paragraph 9;
"Interest Payment Date" means the dates in each year on which interest is expected to be payable; "Interest Reset Date" means the XXXXXXXXXX anniversary of the day the Notes are issued (the "Initial Interest Reset Date" and every XXXXXXXXXX anniversary thereafter of the day the Notes are issued;
"Market Price" means the greater of (i) CAD$XXXXXXXXXX and (ii) XXXXXXXXXX% of the weighted average trading price of XXXXXXXXXX on the XXXXXXXXXX during the XXXXXXXXXX consecutive trading day period ending on the XXXXXXXXXX trading day immediately prior to the date of the issue of the Preferred Shares;
"Maturity" means the expiration of the term of XXXXXXXXXX years of the Notes;
"Note" or "Notes" means the XXXXXXXXXX subordinated indebtedness to be issued by A Co and as described herein;
XXXXXXXXXX;
"Par Redemption Price" in respect of a Note means the aggregate of (i) the Face Value of the Note and (ii) any accrued and unpaid interest on a Note up to the applicable redemption date;
"Preferred Shares" means XXXXXXXXXX;
XXXXXXXXXX;
XXXXXXXXXX;
"Special Event Redemption" means redemption of the Notes following the occurrence of a XXXXXXXXXX Event or a XXXXXXXXXX Event;
XXXXXXXXXX;
XXXXXXXXXX;
"XXXXXXXXXX Event" means XXXXXXXXXX;
"Trust Indenture" means the indenture entered into between A Co and the Trustee in respect of the Notes;
"Trustee" means XXXXXXXXXX acting as Trustee under a Trust Indenture;
XXXXXXXXXX; and
"Winding-Up Order" means a winding-up order in respect of A Co granted by a court XXXXXXXXXX.
FACTS
1. A Co is a taxable Canadian corporation and a public corporation within the meaning of subsection 89(1) of the Act. A Co is a XXXXXXXXXX.
2. A Co's executive offices are situated at XXXXXXXXXX, its business number is XXXXXXXXXX , its Taxation Centre is the XXXXXXXXXX Taxation Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office.
3. A Co's authorized capital includes common shares, which are widely held and are traded on the XXXXXXXXXX and an unlimited number of XXXXXXXXXX Preferred XXXXXXXXXX Shares, issuable in one or more series, including XXXXXXXXXX which are traded on the XXXXXXXXXX.
PROPOSED TRANSACTIONS
4. Subject, inter alia, to the receipt of a favourable advance income tax ruling, A Co proposes to issue the Notes in a public offering in Canada.
5. The Notes will be issued pursuant to the Trust Indenture. The Notes will have a nominal face value of $XXXXXXXXXX (the "Face Value") and will be issued for a price approximating their Face Value. If issued at a discount, the issue price will not be less than XXXXXXXXXX% of the Face Value. A Co anticipates issuing Notes having an aggregate Face Value of $XXXXXXXXXX.
6. The Notes will constitute subordinated, unsecured obligations of A Co and rank pari passu with A Co's XXXXXXXXXX subordinated indebtedness and subordinate to all other XXXXXXXXXX liabilities of A Co.
7. A holder of Notes will have no right to vote at any meeting of shareholders of A Co and will have no right to participate in the profits of A Co. The Notes will rank superior to A Co shares in the event of A Co's insolvency, liquidation, dissolution or winding-up.
Accrual and Payment of Interest
8. From the date of issue of the Notes to but excluding the Initial Interest Reset Date, the Notes will bear interest at a fixed annual rate, which will reflect prevailing interest rates at the date of issue. On and after the Initial Interest Reset Date, the interest rate will be reset on each Interest Reset Date at an interest rate per annum XXXXXXXXXX.
Deferral of Interest
9. Following the occurrence of an Interest Deferral Event, A Co will have the right to defer, at any time and from time to time, subject to certain conditions, payments of interest on the Notes (the period during which the payment of interest is so deferred being referred to as an "Interest Deferral Period") until the next day on which A Co reports cumulative consolidated net income (as determined in accordance with Canadian GAAP) for four financial quarters. All accrued Deferred Interest must be paid before regular interest payments may be resumed and none of the Deferral Interest may extend beyond the date of Maturity of the Notes.
10. While any Deferred Interest remains unpaid:
(a) Deferred Interest will continue to accrue on a non-compounding basis;
(b) A Co shall not declare or pay dividends (other than stock dividends) on, or redeem or repurchase any of its shares; and
(a) (c) A Co shall not make any payment of principal, interest or premium on any debt securities or indebtedness that ranks subordinate to the Notes.
Redemption
11. Except upon the occurrence of a XXXXXXXXXX or a XXXXXXXXXX Event, the Notes will not be redeemable by A Co during the first XXXXXXXXXX years following their issue.
12. On any day on and after the XXXXXXXXXX anniversary of the issuance of the Notes that is not an Interest Reset Date, A Co may, XXXXXXXXXX, redeem all or part of the outstanding Notes by the payment of an amount in cash for each Note equal to the CYP Redemption Price.
13. On any Interest Reset Date, A Co may, XXXXXXXXXX , redeem all or part of the outstanding Notes by the payment of an amount in cash for each Note equal to the Par Redemption Price.
Special Event Redemption
14. Upon the occurrence of a XXXXXXXXXX Event or a XXXXXXXXXX Event, A Co may, at its option and without the consent of any holder of Notes XXXXXXXXXX and on XXXXXXXXXX written notice to holders of Notes, redeem all but not less than all the outstanding Notes by the payment of an amount in cash equal to (a) the Par Redemption Price if redeemed on any Interest Reset Date or (b) the CYP Redemption Price if redeemed on any other date.
Repurchase
15. At any time after the first XXXXXXXXXX years after the issuance of the Notes, A Co may, XXXXXXXXXX, purchase for cancellation any Notes. Such purchase or purchases for cancellation may be made by A Co in the public markets, by tender or by private contract and may be at such price or prices and upon such terms as A Co may determine, subject to applicable laws restricting such a purchase.
Conversion
16. The Notes will not be convertible into any other property except as described below.
17. Upon the occurrence of a Conversion Event the Notes will automatically be converted effective as of XXXXXXXXXX on the day prior to the day of the occurrence of the Conversion Event into fully-paid and freely-tradeable Preferred Shares based on the Conversion Ratio.
18. XXXXXXXXXX.
Events of Default
19. Only upon the insolvency or bankruptcy of A Co will the holders of Notes be entitled to be paid the principal amount of the Notes in cash prior to Maturity.
Maturity
20. On Maturity A Co will repay the principal amount of the Notes then outstanding, together with all accrued but unpaid interest in cash.
PURPOSE OF PROPOSED TRANSACTIONS
21. The purpose of the proposed transactions is to borrow money to be used for the purpose of earning income from a business or property (other than to acquire property the income from which would be exempt or to acquire a life insurance policy). The terms of the Notes described in paragraphs 6, 9, 10, 16 and 17 are required to ensure that XXXXXXXXXX.
RULINGS GIVEN
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 that the funds raised by the issuance of the Notes are used by A Co the purpose of gaining or producing income from a business or property, we rule as follows:
A. Provided that A Co has a legal obligation to pay interest on the Notes as described in paragraph 4 to 8 above, A Co will be entitled to deduct pursuant to paragraph 20(1)(c) of the Act the interest paid or payable (depending on the method regularly followed by A Co in computing its income) in respect of a year as interest on the Face Value of the Notes in computing its income for the year.
B. Provided the amount of any discount paid by A Co in satisfaction of the principal amount of the Notes is equal or less than 3% of its principal amount, the discount will be deductible by A Co in computing its income pursuant to subparagraph 20(1)(f)(i) of the Act in the year of such payment.
These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 dated May 17, 2002 issued by the CRA, and is binding provided the proposed transactions are completed by XXXXXXXXXX.
These rulings are based on the Act in its present form 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 Planning Branch
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