2007 Ruling 2007-0223521R3 - Interest deduction 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 interest deductible on XXXXXXXXXX yr Notes issued by a XXXXXXXXXX under 20(1)(c)? 2. Is the shallow discount on the issue deductible under 20(1)(f)? 3. Is the withholding exemption available to non-residents holders of the Notes who deal at arm's length with the XXXXXXXXXX ?

Position: 1. YES 2. YES 3. YES

Reasons: 1. Meets the provision of 20(1)(c) 2. Meets 20(1)(f)(i), but is too far in the future to rule. 3. Meets the provisions of 212(1)(b)(vii)

XXXXXXXXXX 								2007-022352

XXXXXXXXXX, 2007

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 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.

Unless otherwise specified, all references to monetary amounts are in United States dollars.

Definitions

The following terms have the meanings ascribed to them below:

(a) "ACO" means XXXXXXXXXX;

(b) "Additional Amounts" has the meaning set out in 25 below;

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

(d) "Arm's Length" has the meaning assigned by section 251 of the Act;

(e) "Benchmark Shares" means, XXXXXXXXXX;

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

(g) "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 a Note and (ii) the accrued and unpaid interest thereon, and B is the Market Price of the Benchmark Shares;

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

(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) "Initial Interest Reset Date" means a day that is on or around a particular anniversary of the day the Notes are issued and which will be determined prior to the issuance of the Notes (such anniversary being neither prior to the XXXXXXXXXX anniversary of the day the Notes are issued nor after the XXXXXXXXXX anniversary of the day the Notes are issued);

(l) "Interest Deferral Event" shall occur when, on any day that ACO reports financial results for a financial quarter, (i) ACO does not report cumulative consolidated net income (as determined in accordance with Canadian GAAP or such other accounting principles with which ACO is then required to comply for the purpose of preparing financial statements) for the immediately preceding four quarters, and (ii) during the immediately preceding financial quarter, ACO failed to declare any cash dividends on XXXXXXXXXX;

(m) "Interest Reset Date" means the Initial Interest Reset Date and either (i) every XXXXXXXXXX anniversary thereafter (a "XXXXXXXXXX Year Reset") or (ii) every XXXXXXXXXX months thereafter (a "XXXXXXXXXX Month Reset"). ACO will determine whether the Interest Reset Date will be based upon a XXXXXXXXXX Year Reset or a XXXXXXXXXX Month Reset prior to the issuance of the Notes;

(n) "Market Price" means, at any particular time, the greater of XXXXXXXXXX;

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

(p) "Non-Resident Noteholder" means a Noteholder that is a non-resident of Canada for purposes of the Act;

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

(r) "Noteholder" means a holder of a Note from time to time;

(s) "Notice" means XXXXXXXXXX;

(t) XXXXXXXXXX;

(u) XXXXXXXXXX;

(v) "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;

(w) "Preferred Shares" means a series of XXXXXXXXXX, as described in 20 below;

(x) XXXXXXXXXX;

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

(z) XXXXXXXXXX;

(aa) "XXXXXXXXXX Event" means XXXXXXXXXX;

(bb) "Trigger Event" means XXXXXXXXXX;

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

(dd) "Trustee" means XXXXXXXXXX acting as trustee under the Trust Indenture;

(ee) XXXXXXXXXX;

(ff) XXXXXXXXXX;

(gg) XXXXXXXXXX

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 to holders in the United States. Notes may also be issued to holders 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 up to $XXXXXXXXXX. ACo will use the funds in its long-term capital needs and it is intended that the Notes XXXXXXXXXX of ACO.

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 equal to either (i) if the Interest Reset Date is based upon a XXXXXXXXXX Year Reset, XXXXXXXXXX, or (ii) if the Interest Reset Date is based upon a XXXXXXXXXX Month Reset, a market rate (for example, BBA Libor) plus a spread amount.

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 (the "Deferred Interest"). 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 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 a Trigger Event or an Event of Default, Noteholders will not have the right to require ACO to repay any portion of the principal amount of the Notes.

12. Except upon the occurrence of a XXXXXXXXXX, a XXXXXXXXXX Event or as described in 16 below, the Notes will not be voluntarily redeemable by ACO during the first XXXXXXXXXX years following their issue.

13. 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 USYP Redemption Price.

14. 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.

15. 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 for each Note equal to the USYP Redemption Price or such other amount as specified in the Notes.

16. If ACO has or will become obligated to pay Additional Amounts with respect to any 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, have the right to redeem all but not less than all the outstanding Notes by the payment of an amount in cash for each Note equal to the Par Redemption Price or such other amount as specified in the Notes.

17. Prior to the giving of any such notice of redemption, ACO will deliver to the trustee:

(a) a certificate stating that ACO is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to ACO's right to so redeem have occurred; and

(b) an opinion of independent counsel or written advice of a qualified XXXXXXXXXX expert, such counsel or expert being reasonably acceptable to the trustee, to such effect based on such statement of facts.

18. 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 market, 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.

19. The Notes will not be convertible into any other property except as described below.

20. Upon the occurrence of a Trigger Event, the Notes will be automatically converted effective as of XXXXXXXXXX on the day prior to the day of the occurrence of the Trigger Event into fully-paid and freely-tradable Preferred Shares based on the Conversion Ratio.

21. While a Trigger Event will not constitute an event of default under the Trust Indenture, the failure of ACO to give Notice to the Noteholders of the occurrence of a Trigger Event will constitute an event of default under the Trust Indenture.

22. XXXXXXXXXX.

23. Upon the occurrence of an event of default under the Trust Indenture, Noteholders will have the right to accelerate the Notes.

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

25. ACO may, subject to certain exceptions and limitations, be required to pay such additional amounts ("Additional Amounts") to the beneficial owner of any Note or to the beneficial owner of any Note who is a resident of the United States (for purposes of the Canada-United States Tax Convention (1980)) as may be necessary in order that every net payment of the principal of and interest on such Note and any other amounts payable on the Note, after withholding for or on account of any present or future tax, assessment or governmental charge imposed upon such payment by Canada (or any political subdivision or taxing authority thereof or therein), will not be less than the amount provided for in such Note to be then due and payable.

26. ACO may, subject to certain exceptions and limitations, substitute in place of ACO as debtor under the Notes a subsidiary or affiliate, provided that no payment in respect of the Notes is at the relevant time overdue. The Notes would then become guaranteed by ACO.

Purpose of the Proposed Transactions

27. 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 6, 9, 10 and 20 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 26 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 terms of the Notes are as set out herein, all amounts that ACO pays or credits, or is deemed to pay or credit, to a Non-Resident Noteholder as, on account or in lieu of payment of, or in satisfaction of interest on the Notes will be exempt from withholding tax under Part XIII of the Act by virtue of subparagraph 212(1)(b)(vii) of the Act, provided that at the time the amount is paid or credited, or is deemed to be paid or credited, the Non-Resident Noteholder deals at Arm's Length with ACO.

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.

These rulings are based on the Act as it currently reads and does not take into account any future amendments, whether currently proposed or not, 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.

Comments:

With respect to the Notes issued at a discount in 5 above, in our view, 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.

For greater certainty, the Rulings and Comment above are provided only in respect of ACO prior to any debtor substitution as may take place as noted in 26 above.

Yours truly,

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