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: Whether paragraph 212(1)(b) will apply to regular periodic interest payments on the convertible notes?
Position: No.
Reasons: PUBCO will deal at arm's length with ACO. The regular periodic interest payments will not be participating debt interest within the meaning of the definition in subsection 212(3).
XXXXXXXXXX
2011-041872
XXXXXXXXXX, 2012
Dear XXXXXXXXXX,
Re: Advance Income Tax Ruling
XXXXXXXXXX (Business Number: XXXXXXXXXX)
We are writing in response to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX. We also acknowledge receipt of additional information you provided to us in your letter dated XXXXXXXXXX, and emails dated XXXXXXXXXX.
In this letter, unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter.
DEFINITIONS AND ABBREVIATIONS
In this letter, the names of the persons and certain terms and expressions, are replaced by the following names and abbreviations:
| XXXXXXXXXX |
PUBCO |
| XXXXXXXXXX |
ACO |
| XXXXXXXXXX |
BCO |
| XXXXXXXXXX |
BCO Group |
| XXXXXXXXXX |
TCO |
| Canadian dollar |
CDN$ |
| Common shares of the capital stock of PUBCO as described in paragraph 3 of the Facts |
Common Shares |
| Trust indenture for the Class XXXXXXXXXX Convertible Notes as described in paragraph 10 of the Facts |
Indenture |
| Class XXXXXXXXXX Convertible Notes as described in paragraph 8 and 10 of the Facts |
Class XXXXXXXXXX Notes |
| XXXXXXXXXX as described in paragraph 12 of the Facts |
Rights Plan |
| “Securities Purchase Agreement” as described in paragraph 8 of the Facts |
SP Agreement |
| United States of America dollars |
US$ |
| Income Tax Act |
Act |
FACTS
1. PUBCO is a "public corporation" and a "taxable Canadian corporation" within the meaning of subsection 89(1).
2. PUBCO is engaged in a XXXXXXXXXX business, XXXXXXXXXX.
3. PUBCO was incorporated on XXXXXXXXXX, under the Canada Business Corporations Act. The authorized share capital of PUBCO consists of an unlimited number of voting and participating common shares, without par value ("Common Shares"). As at XXXXXXXXXX, the issued and outstanding share capital of PUBCO consisted of XXXXXXXXXX Common Shares. XXXXXXXXXX
As at XXXXXXXXXX, the issued capital stock of PUBCO consisted of XXXXXXXXXX Common Shares. As at XXXXXXXXXX, the issued capital stock of PUBCO consisted of XXXXXXXXXX Common Shares.
4. The Common Shares of PUBCO are listed for trading on the XXXXXXXXXX Stock Exchange.
5. ACO is a corporation that is resident in XXXXXXXXXX ACO was not incorporated in Canada.
6. PUBCO is not related (within the meaning of subsection 251(2)) to ACO and BCO, and deals at arm's length with ACO and BCO.
7. XXXXXXXXXX
8. On XXXXXXXXXX, PUBCO completed an offering of XXXXXXXXXX Convertible Notes XXXXXXXXXX for a total gross proceeds of US$XXXXXXXXXX.
XXXXXXXXXX The notes were purchased under a Securities Purchase Agreement ("SP Agreement") dated XXXXXXXXXX.
The XXXXXXXXXX Convertible Notes purchased by XXXXXXXXXX included US$XXXXXXXXXX Convertible Note ("Class XXXXXXXXXX Notes"), that were purchased on behalf of ACO.
XXXXXXXXXX
PUBCO issued the Class XXXXXXXXXX Notes as part of the financing required for its XXXXXXXXXX.
XXXXXXXXXX
9. The terms and conditions of the Class XXXXXXXXXX Notes are included in a trust indenture providing for the issue of Class XXXXXXXXXX Notes ("Indenture") executed by PUBCO and TCO, and dated XXXXXXXXXX.
The Class XXXXXXXXXX Notes were issued for US$XXXXXXXXXX, without an original issue discount.
The terms and conditions of the Class XXXXXXXXXX Notes provide notably:
(a) The maturity date ("Maturity Date") is XXXXXXXXXX (section XXXXXXXXXX of the Indenture).
(b) All payments to be made under the Indenture (principal, interest, etc.) shall be made in US$ (section XXXXXXXXXX of the Indenture).
(c) The aggregate principal of the Class XXXXXXXXXX Notes is US$XXXXXXXXXX (section XXXXXXXXXX of the Indenture).
(d) On the Maturity Date, PUBCO will pay the cash amount payable in respect to the Class XXXXXXXXXX Notes, that is, the principal amount together with the accrued interest payable on XXXXXXXXXX. There is no premium payable on the Class XXXXXXXXXX Notes on maturity.
(e) Interest
Interest is payable on the principal (total of US$XXXXXXXXXX) of the Class XXXXXXXXXX Notes at the rate of XXXXXXXXXX% per annum, payable in equal semi-annual payments on the XXXXXXXXXX and XXXXXXXXXX in each year. The first payment of interest was paid on XXXXXXXXXX and the last payment of interest (representing interest payable from and including the last Interest Payment Date to, but excluding, the Maturity date or the earlier date of redemption by PUBCO or conversion of the Class XXXXXXXXXX Notes) will fall due on the Maturity Date or the earlier date of redemption or conversion (sections XXXXXXXXXX and XXXXXXXXXX of the Indenture).
(f) Tax Gross Up
Section XXXXXXXXXX of the Indenture provides that if PUBCO is required to withhold or deduct any amount for or on account of "Canadian Taxes" (as defined under section XXXXXXXXXX of the Indenture) from any payment made under or with respect to the Class XXXXXXXXXX Notes, PUBCO will pay to each holder as additional interest such additional amounts ("Additional Amounts") as may be necessary so that the net amount received by each holder after such withholding or deduction (and after deducting any Canadian Taxes on such Additional Amounts) will not be less than the amount the holder would have received if such Canadian Taxes had not been withheld or deducted.
(g) Right of Conversion
Under section XXXXXXXXXX and XXXXXXXXXX of the Indenture, any part (being US$XXXXXXXXXX or an integral multiple thereof) of the principal of each Class XXXXXXXXXX Note is convertible into Common Shares, at the option of the holder, at any time prior to the close of business on the earlier of: (i) the Maturity Date, and (ii) the last business day immediately preceding the date specified for redemption of the Class XXXXXXXXXX Notes if the Class XXXXXXXXXX Notes are called for redemption by PUBCO, at a conversion price of US$XXXXXXXXXX per Common Share ("Conversion Price"). The conversion ratio is approximately XXXXXXXXXX shares for each US$XXXXXXXXXX principal amount of the Class XXXXXXXXXX Notes.
(h) Adjustments to the Conversion Price
Section XXXXXXXXXX of the Indenture provides that the Conversion Price applicable to the Class XXXXXXXXXX Notes, and the Common Shares, securities or other property receivable on the conversion of the Class XXXXXXXXXX Notes, are subject to adjustments pursuant to detailed provisions in section XXXXXXXXXX of the Indenture in the case of certain events and transactions.
(i) XXXXXXXXXX Payment on a Conversion of the Class XXXXXXXXXX Notes by the BCO Group
Section XXXXXXXXXX of the Indenture provides that PUBCO has the right (at the sole discretion of PUBCO), upon receiving a conversion notice in respect of Class XXXXXXXXXX Notes Beneficially Owned (as defined in the Rights Plan) by the BCO Group, to elect to satisfy its obligations hereunder by delivering (a) either Common Shares of its capital stock at the Conversion Price, or (b) the cash equivalent thereof ("XXXXXXXXXX Payment").
The XXXXXXXXXX Payment (as defined under section XXXXXXXXXX of the Indenture) means a cash amount (in US$) equal to the "XXXXXXXXXX Market Price" (as defined under section XXXXXXXXXX of the Indenture) of the Common Shares in effect on the date of conversion multiplied by the number of Common Shares that the Class XXXXXXXXXX Notes are convertible into on the date of conversion (assuming that PUBCO did not elect to satisfy such conversion in cash).
(j) PUBCO's Right of Redemption
Under section XXXXXXXXXX and XXXXXXXXXX of the Indenture, PUBCO has the right at its option (subject to applicable laws and any required regulatory approval) to redeem the Class XXXXXXXXXX Notes (in whole or in part) at any time (before maturity) when they are held by the XXXXXXXXXX, provided that the Current Market Price of the Common Shares is at least XXXXXXXXXX% of the Conversion Price. The Class XXXXXXXXXX Notes will be redeemable at a price equal to the principal amount plus accrued and unpaid interest to but excluding the Redemption Date. Section XXXXXXXXXX of the Indenture provides that the redemption must be made by payment of money. Section XXXXXXXXXX of the Indenture provides that notice of redemption of the Class XXXXXXXXXX Notes shall be given to the holders of the Class XXXXXXXXXX Notes to be redeemed not more than XXXXXXXXXX days nor less than XXXXXXXXXX days prior to the date fixed for redemption ("Redemption Date"), in the manner provided in section XXXXXXXXXX of the Indenture.
The Indenture does not provide PUBCO with the option to pay with Common Shares the redemption price (on a redemption) of the Class XXXXXXXXXX Notes.
(k) Rank of the Class XXXXXXXXXX Notes
Pursuant to section XXXXXXXXXX of the Indenture, the indebtedness, liabilities and obligations of PUBCO under the Indenture and the Class XXXXXXXXXX Notes, are direct unsecured obligations of PUBCO, and will rank equally with one another and with all other unsecured and unsubordinated indebtedness of PUBCO except as prescribed by law and will rank senior to any existing or future subordinated indebtedness of PUBCO.
(l) Under article XXXXXXXXXX of the Indenture, PUBCO is subject to certain covenants. Section XXXXXXXXXX of the Indenture provides:
XXXXXXXXXX
10. None of the Class XXXXXXXXXX Notes held by ACO have been converted into Common Shares of PUBCO.
11. XXXXXXXXXX
12. SP Agreement
Section XXXXXXXXXX of the SP Agreement provides that the aggregate purchase price for the Class XXXXXXXXXX Notes XXXXXXXXXX
Section XXXXXXXXXX of the SP Agreement provides:
XXXXXXXXXX
13. XXXXXXXXXX.
14. XXXXXXXXXX.
PROPOSED TRANSACTIONS
15. As provided in the Indenture and the Class XXXXXXXXXX Notes, PUBCO will make each of the semi-annual payments of interest ("Regular Periodic Interest Payments") on the Class XXXXXXXXXX Notes on the XXXXXXXXXX and XXXXXXXXXX for each of the XXXXXXXXXX to XXXXXXXXXX years, if the Class XXXXXXXXXX Notes are still outstanding at the relevant date for the relevant payment.
The Regular Periodic Interest Payments will not include any Additional Amount as described in section XXXXXXXXXX of the Indenture.
It is anticipated that PUBCO will deal at arm's length with ACO at the time of the Regular Periodic Interest Payments.
16. To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling is: (i) involved in an earlier return of the taxpayers or a related person, (ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person, (iii) under objection by the taxpayers or 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 ruling previously issued by the Income Tax Rulings Directorate.
17. PUBCO is served by the XXXXXXXXXX Tax Service Offices and files its federal tax return at the XXXXXXXXXX Tax Centre. PUBCO's head office is located at XXXXXXXXXX.
PURPOSE OF THE PROPOSED TRANSACTIONS
18. The Class XXXXXXXXXX Notes were issued by PUBCO in order to finance the XXXXXXXXXX in XXXXXXXXXX. The Regular Periodic Interest Payments must be made by PUBCO as provided in the Indenture and the Class XXXXXXXXXX Notes.
RULINGS GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions and Purpose of the Proposed Transactions, and provided that the Proposed Transactions are completed in the manner described above, we rule as follows:
A. For the purposes of paragraph 212(1)(b), the Regular Periodic Interest Payments described in paragraph 15 will not be "participating debt interest" within the meaning of the definition in subsection 212(3).
B. The Regular Periodic Interest Payments that will be made by PUBCO to ACO will not be subject to Part XIII withholding tax under paragraph 212(1)(b), provided that PUBCO deals at arm's length with ACO at the time of the payments.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the Proposed Transactions are completed by XXXXXXXXXX.
The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to, reviewed or has made any determination in respect of any other tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the rulings given above.
An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.
Yours truly,
XXXXXXXXXX
For Director
Financial Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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