2007 Ruling 2006-0218931R3 - Material Adverse Clause and Withholding Exemption

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: Is the material adverse clause in the material adverse effect provisions of the events of default acceptable for the purposes of the withholding exemption under 212(1)(b)(vii)?

Position: YES

Reasons: Objective standard

XXXXXXXXXX 								2006-021893

XXXXXXXXXX, 2007

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling in respect of the above-named taxpayer. We also acknowledge information provided in telephone conversations and electronic correspondences.

To the best of your knowledge and that of the taxpayer involved, none of the issues contained in this ruling request are:

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

(ii) being considered by a tax services office or a taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) the subject to a ruling previously issued by the Income Tax Rulings Directorate to the taxpayer or a related person; nor

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

To the best of your knowledge, and that of the taxpayer involved, the proposed transactions will not impact the ability of any taxpayer involved to pay its existing tax liabilities.

In this letter, unless otherwise indicated, all statutory references are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c. 1, as amended, (the "Act").

Unless otherwise specified all dollar amounts are denominated in Canadian dollars.

Definitions

In this advance income tax ruling request, the following terms have the following meanings:

(a) "Additional Restricted Parties" means the Restricted Parties other than the Borrower;

(b) "Agent" means XXXXXXXXXX in its role as administrative agent for the Lenders, and any successor administrative agent appointed in accordance with the Credit Agreement;

(c) "Arrangers" is defined in 3 below;

(d) "Borrower" means XXXXXXXXXX , a corporation resident in Canada for purposes of the Act XXXXXXXXXX;

(e) "Canadian Resident Lenders" means Lenders who are resident in Canada for purposes of the Act;

(f) "Closing Date" means XXXXXXXXXX;

(g) "Commitment Letter" is defined in 3 below;

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

(i) "Credit A" means the facility described in 3(a) below;

(j) "Credit Agreement" means the credit agreement dated as of XXXXXXXXXX between the Borrower, as borrower, XXXXXXXXXX, as additional Restricted Parties, XXXXXXXXXX, as administrative agent and the banks and other financial institutions party thereto, as lenders;

(k) "Credit B" means the loan described in 3(b) below;

(l) "Credit B1" means the loan described in 8(a) below;

(m) "Credit B2" means the loan described in 8(b) below;

(n) "Credit C" means the loan described in 3(c) below;

(o) "Credit Documents" means the Credit Agreement, the Security, the promissory notes or other evidence of indebtedness and all other documents relating to the Credits, or any of them together with all agreements governing derivative and/or hedging transactions entered into with the Lenders or their affiliates;

(p) "Credits" means Credit A, Credit B1, Credit B2 and Credit C;

(q) "Encumbrance" means any mortgage, debenture, pledge, hypothec, lien, charge, assignment by way of security, consignment, lease, hypothecation, security interest or other security agreement, trust or arrangement having the effect of security for the payment of any debt, liability or obligation;

(r) "Existing Credit Facility" is defined in 2 below;

(s) "Facilities" means the financing facilities pursuant to which the Credits are to be advanced;

(t) "Lenders" means each of the lenders under the Facilities;

(u) "MAC Default" means the material adverse default clause in the Credit Agreement as an event of default described in 10 below;

(v) "Material Contracts" means the present and future contracts, written or oral, to which any Restricted Party is a party or by which it is bound, the loss or termination of which would have a material adverse effect on the property, business, operations, financial condition or business prospects of the Restricted Parties taken as a whole, including, but not limited to, certain contracts that are specified in the Credit Agreement, as amended from time to time;

(w) "Material Permits" means all present and future permits that are material to the property, business or operations of the Restricted Parties, taken as a whole, including, but not limited to the permits that are specified in the Credit Agreement, as amended from time to time;

(x) "Non-Resident Lenders" means Lenders who are not resident in Canada for purposes of the Act;

(y) XXXXXXXXXX;

(z) "Projects" means the construction projects in XXXXXXXXXX;

(aa) "Property" means, with respect to any person (i..e, individual, corporation, company, partnership, unincorporated association, trust, joint venture, estate or other judicial entity or any governmental body), any or all of its undertaking, property and assets;

(bb) "Restricted Parties" means the Borrower and XXXXXXXXXX and any person that becomes a subsidiary of the Borrower and that becomes a Restricted Party in accordance with the terms of the Credit Agreement;

(cc) "Security" means the security held from time to time by the Lenders, or the agent or the Trustee on behalf of the Lenders (and other creditors where applicable), securing or intended to secure repayment of the obligations, including without limitation the security described in the Credit Agreement;

(dd) "Sources and Uses" means the statement of sources and uses of financing and budget for construction of each Project which is under construction individually and of the Borrower on a consolidated basis in the form specified in the Credit Agreement, as updated from time to time in accordance with the Credit Agreement;

(ee) "Term Sheet" is defined in 3 below;

(ff) "Term Sheet MAE Provision" is defined in 5 below; and

(gg) "Trustee" means XXXXXXXXXX in its capacity as trustee and fondé de pouvoir (holder of a power of attorney for civil law purposes) under documents forming part of the Security from time to time, and any future successor.

Facts

1. XXXXXXXXXX.

2. Since XXXXXXXXXX, the Borrower has had a credit facility (the "Existing Credit Facility") from XXXXXXXXXX, which has been amended and restated a number of times, most recently to increase the available credit to $XXXXXXXXXX. To provide financing to complete the plant in XXXXXXXXXX and to build the XXXXXXXXXX new plants in XXXXXXXXXX, the Borrower has sought credit facilities in a much higher aggregate amount.

3. The Borrower entered into a commitment letter (including a term sheet) (the "Commitment Letter" and "Term Sheet") with XXXXXXXXXX (the "Arrangers") to lend up to $XXXXXXXXXX by way of:

(a) a revolving loan of up to $XXXXXXXXXX ("Credit A"), to be used to finance working capital and for general corporate purposes of the Borrower and the Additional Restricted Parties;

(b) an immediate term loan of $XXXXXXXXXX ("Credit B"), to be used to repay existing debt, to pay costs related to the Projects and for general corporate purposes of the Borrower and the Additional Restricted Parties; and

(c) a delayed-draw term loan of $XXXXXXXXXX (or the equivalent amount in U.S. Dollars) ("Credit C"), to be used to pay costs related to the Projects.

Loans under all of these credits would have a final maturity date on the XXXXXXXXXX anniversary of the initial advance.

4. The Commitment Letter contemplated that prior to funding the Facilities, the Arrangers would find additional Canadian Resident Lenders to join in a syndicate to lend under the Facilities.

5. The Term Sheet set out, among other things, certain events of default which included a default if the Borrower experienced a material adverse change in its business or prospects as determined in the discretion of the Lenders. That provision (the "Term Sheet MAE Provision") provided that there would be a default if:

"XXXXXXXXXX".

XXXXXXXXXX, this was the same wording as one of the events of default in the Existing Credit Facility, and the Borrower agreed, at the time of negotiating the Term Sheet, to its inclusion in the definitive loan documentation for the Credits, which the parties had agreed would follow the same general approach as the Existing Credit Facility.

6. At the time that the Commitment Letter was executed, the Arrangers had advised the Borrower that while they were confident that the syndication of the Facilities could be accomplished on the basis that all Lenders would be residents of Canada, they wished to have the flexibility to approach prospective Lenders in the United States to participate in the syndication of Credit B, in which event the interest payable under that Credit might have to be increased, and the Borrower agreed to the inclusion of a "flex" provision in the fee letter (entered into with the Arrangers concurrently with the Commitment Letter) to facilitate this.

7. After execution of the Commitment Letter, the Borrower and the Arrangers entered into negotiations to complete definitive loan documentation, and the Arrangers commenced efforts to find other Lenders willing to participate in the syndication of the Facilities. In the course of those syndication efforts, the Arrangers advised the Borrower that there was insufficient interest on the part of prospective Canadian Resident Lenders to make all of the loans requested by the Borrower at the rates set out in the Term Sheet, and that they wished to extend their syndication efforts to the United States "Term Loan B" market.

8. For this purpose, the Arrangers and the Borrower agreed to divide Credit B into two separate loans:

(a) Credit B1, a term loan in the amount of $XXXXXXXXXX, having a maturity date on the XXXXXXXXXX anniversary of the initial advance, which would be advanced and held by Canadian Lenders; and

(b) Credit B2, a term loan of US$XXXXXXXXXX (being the equivalent of $XXXXXXXXXX ) having a maturity date on the day following the XXXXXXXXXX anniversary of the initial advance; and having other terms which were necessary so the Credit B2 would be considered by Non-Resident Lenders and would also fall within the requirements of subparagraph 212(1)(b)(vii) of the Act, such that if it was held by Non-Resident Lenders, it would not be subject to withholding tax under the Act.

Changes were made to the draft documents to facilitate the inclusion of the prospective Non-Resident Lenders including setting different interest rates under Credit B1 and Credit B2 (reflecting the different expectations of the different marketplaces), setting different repayment schedules and providing for the inclusion of a gross-up provision and withholding tax indemnity under the terms of Credit B2.

9. It was agreed that while the Arrangers would advance the full amount of Credit B2 to the Borrower on the Closing Date, they would then continue their efforts to syndicate that part of the Facilities in the Term Loan B market, with a view to transferring their Credit B2 loans to Non-Resident Lenders early in XXXXXXXXXX.

10. Notwithstanding the agreement of the Borrower and the Arrangers to the terms of the Term Sheet MAE Provision, tax counsel advised the Borrower that the Term Sheet MAE Provision was not consistent with the published administrative practice of the CRA and the Term Sheet MAE Provision should be amended. The Term Sheet MAE Provision was accordingly replaced with the following in section XXXXXXXXXX of the Credit Agreement, which defined as an event of default:

"XXXXXXXXXX".

11. The events of default in the Credit Agreement apply to all of the Credits; therefore, the change to the Term Sheet MAE Provision to the MAC Default set out in 10 above affected all of the Credits. It would not have been acceptable to the Arrangers to have one material adverse effect default apply only to Credit A, Credit B1 and Credit C and a different material adverse effect default apply only to Credit B2 because the Lenders under Credit B2 would not have accepted a situation where all of the other Credits could be in default other than Credit B2. At a minimum, there would have needed to be a cross-default provision, which would have essentially meant that the material adverse effect event of default in the other Credits could still cause an event of default under Credit B2. Therefore, in negotiating the MAC Default it had to be acceptable to all of the Lenders under the Facilities and not just the Lenders under Credit B2.

12. All of the Lenders on the Closing Date will be Canadian Resident Lenders. The entire amount of Credit B2 will be drawn on the Closing Date.

13. All of the Additional Restricted Parties are, or will be during the term of the Credits, material to the credit worthiness of the Borrower.

14. The Credit Agreement contemplates and permits assignments of Credit B2 loans from Canadian Resident Lenders to Non-Resident Lenders. Following further syndication as described above, it is expected that all of the Credit B2 loans will be assigned to Non-Resident Lenders. The Credit Agreement provides that an assignment of an interest in any of the loans to a new Lender will not constitute or be deemed to constitute a novation, discharge, rescission, extinguishment or substitution of the existing indebtedness and any new indebtedness so assigned shall continue to be the same obligation and not a new obligation.

15. The Borrower will deal at arm's length with the Non-Resident Lenders.

Proposed Transaction

16. On the Closing Date, the Arrangers will advance the Credit B2 loans to the Borrower. After the Closing Date, the Arrangers propose to assign the Credit B2 loans to Non-Resident Lenders. The proposed transaction is the assignment by the Arrangers of the Credit B2 Loans to Non-Resident Lenders and the obligation of the Borrower to thereafter pay interest and principal to Non-Resident Lenders.

Purpose of Proposed Transaction

17. The Arrangers intend to syndicate Credit B2 to Non-Resident Lenders to allow them to reduce their credit exposure in respect of the Facilities.

Ruling Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transactions and purpose of the proposed transactions, and that the final agreements referred to in this letter are substantially the same as the documents provided to us as reflected herein, and provided further that the proposed transactions are completed in the manner described above, we rule as follows:

The MAC Default as described in 10 above will not, in and of itself, cause the exemption from withholding tax in subparagraph 212(1)(b)(vii) of the Act to not apply in respect of interest payments made by the Borrower to a Lender who for the purposes of the Act is a non-resident of Canada, and provided further that at the time of the payment, the Lender deals at arm's length with the Borrower.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 issued by the CRA on May 17, 2002, and is binding provided the Credit Documents are entered into on or before XXXXXXXXXX.

The 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.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:

(i) the GST implications of any of the proposed transactions;

(ii) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein; nor

(iii) the nature of the legal relationship entered into or contemplated by the entities named above.

Yours truly,

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