2006 Ruling 2006-0187411R3 - Interest deduction on XXXXXXXXXX -year notes

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 shallow 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 - XXXXXXXXXX - Shallow discounts may apply

XXXXXXXXXX 							2006-018741

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX ("ACO").

We understand that to the best of your knowledge and that of the taxpayer involved none of the issues involved in the requested ruling is:

(i) dealt with in an earlier return of ACO or a related person;

(ii) being considered by any tax services office or taxation centre in connection with a tax return already filed;

(iii) under objection by ACO or by a related person;

(iv) the subject of a previously issued ruling by the Income Tax Rulings Directorate of the CRA to ACO or a related party; nor

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

DEFINITIONS:

(a) "ACO" means XXXXXXXXXX;

(b) "Administrative Action" has the meaning set out in the definition of "Tax Event" below;

(c) "Benchmark Shares" means, XXXXXXXXXX;

(d) "Canadian GAAP" means Canadian generally accepted accounting principles;

(e) "Conversion Event" means the occurrence of any of the following events:

XXXXXXXXXX;

(f) "Conversion Ratio" means that number of Preferred Shares of ACO 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 and unpaid interest thereon, and B is the Market Price of the Benchmark Shares;

(g) "CRA" means the Canada Revenue Agency;

(h) "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, but excluding, the redemption date;

(i) "Deferred Interest" means interest on the Notes the payment of which has been deferred as described in 9 below;

(j) "Face Value" has the meaning set out in 5 below;

(k) XXXXXXXXXX;

(l) XXXXXXXXXX;

(m) "Initial Interest Reset Date" means a day that is on or around the XXXXXXXXXX anniversary of the day the Notes are issued;

(n) "Interest Deferral Event" shall occur when, on any day that ACO reports financial results for a financial quarter, ACO 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, ACO failed to declare any cash dividends on XXXXXXXXXX;

(o) "Interest Reset Date" means the Initial Interest Reset Date and every XXXXXXXXXX anniversary thereafter;

(p) "Market Price" means, at any particular time, XXXXXXXXXX

XXXXXXXXXX

(q) "Maturity" means the expiration of the term of XXXXXXXXXX years of the Notes;

(r) "Note" or "Notes" means the subordinated indebtedness to be issued by ACO as described herein;

(s) XXXXXXXXXX;

(t) XXXXXXXXXX;

(u) "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 the Note up to, but excluding, the applicable redemption date;

(v) "Preferred Shares" means the XXXXXXXXXX, as described in 17 below;

(w) XXXXXXXXXX;

(x) "Special Event Redemption" means redemption of the Notes following the occurrence of a XXXXXXXXXX or a XXXXXXXXXX Event;

(y) XXXXXXXXXX;

(z) "XXXXXXXXXX Event" means

XXXXXXXXXX

(aa) "Trust Indenture" means the indenture to be entered into between ACO and the Trustee in respect of the Notes; and

(bb) "Trustee" means XXXXXXXXXX acting as trustee under the Trust Indenture.

FACTS

1. ACO is a "taxable Canadian corporation" and a "public corporation" within the meaning of subsection 89(1) of the Act. XXXXXXXXXX.

2. ACO's executive offices are situated at the XXXXXXXXXX. Its Taxation Centre is the XXXXXXXXXX Taxation Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office.

3. ACO's authorized capital includes common shares, which are widely held and traded on the XXXXXXXXXX and an unlimited number of XXXXXXXXXX Preferred Shares, issuable in more than one series.

PROPOSED TRANSACTIONS

4. Subject, inter alia, to the receipt of a favourable advance income tax ruling, ACO 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 face value of $XXXXXXXXXX (the "Face Value") and will be issued for a price approximately equal to the Face Value. If issued at a discount, the issue price will not be less than XXXXXXXXXX% of the Face Value. ACO anticipates issuing Notes having an aggregate Face Value of $XXXXXXXXXX.

6. The Notes will constitute subordinated, unsecured indebtedness of ACO and rank pari passu with all other subordinated indebtedness of ACO and will be subordinate to all XXXXXXXXXX liabilities of ACO and all other liabilities of ACO except liabilities which by their terms rank in right of payment equally with or subordinate to the Notes.

7. A holder of the Notes will have no right to vote at any meeting of shareholders of ACO and will have no right to participate in the profits of ACO. The Notes will rank superior to ACO shares in the event of ACO's insolvency, liquidation, dissolution or winding up.

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.

9. Following the occurrence of an Interest Deferral Event, ACO will have the right to defer, at any time and from time to time, subject to certain conditions, payments of interest on the Notes. All accrued Deferred Interest must be paid before regular interest payments may be resumed and none of the Deferred Interest may extend beyond the Maturity of the Notes.

10. While any Deferred Interest remains unpaid:

(a) Deferred Interest will continue to accrue on a non-compounding basis;

(b) ACO shall not declare or pay dividends (other than stock dividends) on, or redeem or repurchase any of its XXXXXXXXXX Preferred Shares or common shares; and

(c) ACO shall not make any payment of principal, interest, or premium on any indebtedness that ranks subordinate to the Notes.

11. Except upon the occurrence of a XXXXXXXXXX or a XXXXXXXXXX Event, the Notes will not be redeemable by ACO 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, ACO may, at its option, XXXXXXXXXX , and on XXXXXXXXXX notice to the holders of the Notes, 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, ACO may, at its option, XXXXXXXXXX, and on XXXXXXXXXX notice to the holders of the Notes, 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.

14. Upon the occurrence of a XXXXXXXXXX or a XXXXXXXXXX Event prior to the XXXXXXXXXX anniversary of the issuance of the Notes, ACO may, at its option and without the consent of any holder of the Notes XXXXXXXXXX and upon XXXXXXXXXX notice to the holders of the Notes, redeem all but not less than all the outstanding Notes by the payment of an amount in cash equal to the CYP Redemption Price.

15. At any time on or after the XXXXXXXXXX anniversary date of the issuance of the Notes, ACO may, XXXXXXXXXX, purchase for cancellation any Notes. Such purchase or purchases for cancellation may be made by ACO in the public markets, by tender or by private contract and may be at such price or prices and upon such terms as ACO may determine, subject to applicable laws restricting such a purchase.

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 be automatically converted effective as of XXXXXXXXXX on the day prior to the day of the occurrence of the Conversion Event into fully-paid and freely-tradable Preferred Shares based on the Conversion Ratio.

18. Only upon the insolvency or bankruptcy of ACO will the holders of Notes be entitled to be paid the principal amount of the Notes in cash prior to Maturity.

19. On Maturity, ACO will repay the principal amount of the Notes then outstanding, together with all accrued but unpaid interest in cash.

PURPOSE OF THE PROPOSED TRANSACTIONS

20. The purpose of the proposed transactions is to borrow money to be used for the purpose of earning income from a business or property. The terms of the Notes described in 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 ACO for the purpose of gaining or producing income from a business or property, we rule as follows:

A. Provided that ACO has a legal obligation to pay interest on the Notes as described in 4 to 19 above, ACO 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 ACO in computing its income) in respect of a year on the Face Value of the Notes in computing its income for the year.

B. Provided the amount of any discount paid by ACO in satisfaction of the principal amount of the Notes is equal to or less than 3% of its principal amount, the discount will be deductible by ACO 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 are binding provided the proposed Notes are issued on or before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch