2012 Ruling 2011-0423511R3 - Contingent capital

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: Are the Notes which contain XXXXXXXXXX Conversion clause considered debt?

Position: YES

Reasons: XXXXXXXXXX.

XXXXXXXXXX
2011-042351
XXXXXXXXXX, 2012

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 the above-named taxpayer.

We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues contained in this ruling are:

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

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

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

(iv) the subject of a previous ruling request considered by the Income Tax Rulings Directorate with respect to ACO 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.

DEFINITIONS

Unless otherwise noted, (i) all references herein to sections or components thereof are references to the Income Tax Act (the “Act”), as amended, or the Income Tax Regulations (the “Regulations”), as appropriate, and (ii) all references to monetary amounts XXXXXXXXXX.

In addition, unless otherwise noted, the following terms have the meanings ascribed to them below:

(a) “ACO” means XXXXXXXXXX;

(b) XXXXXXXXXX;

(c) XXXXXXXXXX;

(d) XXXXXXXXXX;

(e) “Common Shares” means the common shares described in 3 below;

(f) XXXXXXXXXX;

(g) “CRA” means the Canada Revenue Agency;

(h) XXXXXXXXXX;

(i) XXXXXXXXXX;

(j) XXXXXXXXXX;

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

(l) “Interest Reset Date” means the Initial Interest Reset Date and a day that is every XXXXXXXXXX months thereafter;

(m) “Maturity” means the expiration of the term of the Notes, which is not to exceed XXXXXXXXXX;

(n) “Note” or “Notes” means the subordinated indebtedness to be issued by ACO as described in 5 and 6 below;

(o) “Par Redemption Price” in respect of a Note means the aggregate of (i) the Principal Amount of the Note and (ii) any accrued and unpaid interest on the Note up to, but excluding, the applicable redemption date;

(p) “Principal Amount” has the meaning assigned by subsection 248(1) and, in respect of the Notes, means $XXXXXXXXXX per Note;

(q) XXXXXXXXXX;

(r) XXXXXXXXXX;

(s) “Special Event Redemption” means redemption of the Notes following the occurrence of a XXXXXXXXXX Tax Event;

(t) XXXXXXXXXX;

(u) “Tax Event” means XXXXXXXXXX;

(v) XXXXXXXXXX;

(w) XXXXXXXXXX;

(x) “XXXXXXXXXX Conversion” means conversion of the Notes into Common Shares XXXXXXXXXX as described in 14 below;

(y) “Trust Indenture” means the indenture entered into between ACO and the Trustee and dated as of XXXXXXXXXX, as supplemented from time to time;

(z) “Trustee” means XXXXXXXXXX acting as trustee under the Trust Indenture; and

(aa) 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 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 XXXXXXXXXX.

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 XXXXXXXXXX.

5. The Notes will be issued pursuant to the Trust Indenture. The Notes will be issued in denominations of $XXXXXXXXXX and integral multiples thereof and will be issued for an amount approximately equal to their Principal Amount. If issued at a discount, the issue price will not be less than XXXXXXXXXX% of their Principal Amount. ACO anticipates the offering to be for an aggregate amount of up to $XXXXXXXXXX.

6. The Notes will constitute subordinated, unsecured indebtedness of ACO and rank pari passu with all other subordinated indebtedness of ACO from time to time issued and outstanding, XXXXXXXXXX.

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. Subject to the XXXXXXXXXX Conversion, the Notes will rank superior to ACO shares in the event of ACO’s insolvency, liquidation, dissolution or winding up.

Accrual and Payment of Interest

8. From the date of issue of the Notes to the Initial Interest Reset Date, the Notes will bear interest, XXXXXXXXXX.

XXXXXXXXXX:

9. XXXXXXXXXX.

10. XXXXXXXXXX.

Special Event Redemption

11. Upon the occurrence of a XXXXXXXXXX Tax Event XXXXXXXXXX, ACO may, at its option and without the consent of any holder of the Notes, XXXXXXXXXX and upon giving not more than XXXXXXXXXX days nor less than XXXXXXXXXX days notice to the holders of the Notes, redeem all or part of the outstanding Notes XXXXXXXXXX.

Repurchase

12. XXXXXXXXXX.

Conversion

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

14. XXXXXXXXXX, the Notes will be, XXXXXXXXXX converted (the “XXXXXXXXXX Conversion”), XXXXXXXXXX, into fully-paid and freely-tradable Common Shares XXXXXXXXXX. Fractions of Common Shares will not be issued or delivered pursuant to a XXXXXXXXXX Conversion and no cash payment will be made in lieu thereof.

15. XXXXXXXXXX.

16. Upon a XXXXXXXXXX Conversion of the Notes for Common Shares, ACO reserves the right not to issue Common Shares to any XXXXXXXXXX.

17. On any interest payment date, a holder of the Notes may, but only upon prior notice from ACO, XXXXXXXXXX, convert all (but not less than all) of the Notes held by such holder into an equal aggregate Principal Amount of subordinated indebtedness issued by ACO, XXXXXXXXXX. Any such notice by ACO shall be given not less than XXXXXXXXXX days nor more than XXXXXXXXXX days prior to the date fixed for conversion.

Events of Default

18. Events of default under the Notes will occur only if ACO becomes insolvent or bankrupt or resolves to wind-up or liquidate or is ordered wound-up or liquidated XXXXXXXXXX. If an event of default occurs and continues and the Notes have not already been XXXXXXXXXX exchanged for Common Shares of ACO, the Trustee may, in its discretion and shall upon the request of holders of not less than one quarter of the principal amount of the Notes then outstanding, declare the principal of and interest on all outstanding Notes to be immediately due and payable.

Maturity

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

Other Covenants

20. ACO will agree for the benefit of the holders of the Notes that ACO will not (i) assign or otherwise transfer any of its obligations under the Trust Indenture, except in the case of a merger, amalgamation, reorganization or a sale of substantially all of the assets of ACO, as the case may be; or XXXXXXXXXX.

PURPOSE OF THE 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). XXXXXXXXXX.

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 provided that the proposed transactions are completed in the manner described above, we rule as follows:

A. Provided ACO has a legal obligation to pay interest on the Notes and the proceeds from the issue of the Notes are used and continue to be used for the purpose of earning income from a business or property, and the proceeds are not used to acquire a life insurance policy or property the income from which would be exempt, ACO will be entitled, pursuant to paragraph 20(1)(c) of the Act, to deduct in computing its income in respect of a taxation year an amount in respect of the Notes up to the lesser of (i) the interest paid in the year by ACO on the Notes or payable by ACO on the Notes in respect of the year (depending on the method regularly followed by ACO in computing its income for the purposes of the Act) or (ii) a reasonable amount in respect thereof.

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 CRA provided that the proposed Notes are issued 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.

Yours truly,

XXXXXXXXXX
For Director
XXXXXXXXXX
Income Tax Rulings Directorate