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: Where an investment grade rating is assigned to a debt obligation by an affiliate/subsidiary of a prescribed credit rating agency, will the conditions of subparagraph (c.1)(i) of the definition of "qualified investment" in section 204 of the Act be satisfied? Where a rating agency assigns an investment grade rating to a debt issuers debt issuance program, as opposed to each tranche of debt issued under the program, will the conditions of paragraph (c.1) be satisfied?
Position: Question of fact.
Reasons: Who actually assigns a rating for purposes of paragraph (c.1) will depend on the corporate structure of the rating agency and the legal relationships between the rating agency and the agency's subsidiaries/affiliates. It will be a question of fact whether an investment grade rating assigned to a debt issuer's debt issuance program will apply to all debt obligations issued under the program for purposes of paragraph (c.1).
XXXXXXXXXX
2012-044437
G. Allen
January 31, 2013
Dear XXXXXXXXXX
Re: Section 204 Paragraph (c.1) of "Qualified Investment"
This letter is in response to your email sent April 17, 2012 wherein you posed two questions regarding our interpretation of paragraph (c.1) of the definition of "qualified investment" in section 204 of the Income Tax Act (the "Act"). Your first question was whether a rating provided by a subsidiary/affiliate, which is a separate legal entity, of one of the listed rating agencies in subsection 4900(2) of the Income Tax Regulations (the "Regulations") is considered to be provided by the listed rating agency. In your second question, you enquire whether a rating assigned by a rating agency to a debt issuance program of a debt issuer would satisfy the conditions of paragraph (c.1), or must each series or tranche of debt issued under the program be rated for purposes of paragraph (c.1).
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Nonetheless, we have provided some general comments below, which we hope will be of some assistance to you. However, as stated in paragraph 22 of the Information Circular, this opinion is not binding on the Canada Revenue Agency in respect of any particular situation.
Our Comments
Paragraph (c.1) of the definition of "qualified investment" in section 204 of the Act provides that debt obligations that satisfy certain conditions will be qualified investments for trusts governed by certain deferred income plans, e.g., registered retirement savings plans. One of the conditions that must be satisfied is that the debt obligations had or have, at the time of acquisition by a trust, an investment grade rating with a prescribed credit rating agency. Subsection 4900(2) of the Regulations lists the prescribed credit rating agencies for purposes of paragraph (c.1). It is a question of fact whether a rating is provided by one of the listed rating agencies. In the context of your first question, this would depend on the corporate structure of, and legal relationships between, the listed rating agency and the agency's subsidiaries or affiliates that may issue debt ratings. Where it is clear, based on the facts and legal relationships, that a rating issued by a listed rating agency's subsidiary or affiliate is issued to the debt issuer or for public purposes, as the case may be, is recognized by the listed rating agency such that the listed rating agency listed in subsection 4900(2) of the Regulations would stand by the rating given, then in our view, the condition of paragraph (c.1), described above, will be satisfied.
Concerning your second question, under clauses (c.1)(i)(A) and (B) of the definition of "qualified investment" in section 204 of the Act, debt obligations that had or have, at the time acquired by a trust, an investment grade rating with a prescribed credit rating agency will be a qualified investment. In a situation where a prescribed rating agency assigns an investment grade rating to a debt issuer's debt issuance program, it is a question of fact whether the conditions in clauses (c.1)(i)(A) and (B) are satisfied. Where it is clear, based on the facts, that all debt obligations issued under the debt issuance program will have the investment grade rating assigned to the debt issuance program, in our view, the conditions of clauses (c.1)(i)(A) and (B) will be satisfied.
We trust that our comments will be of assistance to you.
Lita Krantz, CPA, CA
for Director
Financial Industries and Trusts Division
Deferred Income Plans Section II
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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