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: What is the CRA's current position with respect to the application of Part XIII tax to convertible and exchangeable debentures?
Position: See below.
Reasons: See below.
MAY 23, 2013 CRA ROUND TABLE
2013 IFA INTERNATIONAL TAX SEMINAR
Question 9 Convertible and Exchangeable Debentures
What is the CRA's current position with respect to the application of the Part XIII tax to convertible and exchangeable debentures owned by foreign lenders (i.e., paragraph 212(1)(b), the definition of "participating debt interest" in subsection 212(3), subsection 214(7) and their qualification as an "excluded obligation" under paragraph 214(8)(c) of the ITA)?
Is there anything new to report?
CRA's Response
Convertible Debentures
In response to Q.12 at the CRA Round Table at the May 2009 IFA conference, the CRA stated that where there is a conversion of a traditional convertible debenture (as described in the response) by its original holder for common shares of the capital stock of the issuer, there would generally be no excess under subsection 214(7) of the ITA.
In XXXXXXXXXX 2012, the Income Tax Rulings Directorate ("ITRD") issued a ruling (document 2011-0418721R3) stating that the regular periodic interest payments on a certain convertible debt would not be "participating debt interest" as defined in subsection 212(3) of the ITA. The convertible debt had been issued by a taxable Canadian corporation to a non-resident. The ruling letter should be released to publishers of tax information in the near future.
The ITRD of the CRA is currently examining certain questions of interpretation and submissions made by The Joint Committee on Taxation of The Canadian Bar Association and The Canadian Institute of Chartered Accountants ("Joint Committee") concerning the possible application of Part XIII tax with respect to convertible debentures issued by issuers in Canada.
The Joint Committee would like the CRA to establish guidelines that would apply to a broad range of convertible debentures that are issued in Canada. These debentures, referred to as "standard convertible debentures" by the Joint Committee, would include the usual provisions that are included in most convertible debenture contracts.
The ITRD has written to the Department of Finance in order to obtain its views concerning the tax policy with respect to the application of paragraph 212(1)(b), subsection 214(7), paragraph 214(8)(c) and the definition of "participating debt interest" in subsection 212(3) of the ITA, in the context of convertible debentures.
Our analysis of the relevant issues is substantially advanced. However, we believe that it is important to obtain the views of the Department of Finance concerning the tax policy in relation to these issues before the ITRD provides any guideline to the Joint Committee concerning convertible debentures. At this time, we are unable to provide any guidance as to when we will be in a position to provide a response to the Joint Committee.
Exchangeable Debentures
Exchangeable debentures have been used in the past in the context of the "monetization" of shares of the capital stock of public corporations owned by the issuers of debentures. The interest paid on exchangeable debentures could be a proxy for the dividends paid on the shares into which the debentures are convertible. Accordingly, it may be relevant to determine whether the interest paid on exchangeable debentures constitutes "participating debt interest" within the meaning of the definition in subsection 212(3) of the ITA.
We are not prepared to provide additional comments concerning the potential application of Part XIII tax with respect to exchangeable debentures without knowing all the relevant facts in relation to particular situations (including the terms and conditions of the exchangeable debentures).
If you have concerns concerning the application of Part XIII of the ITA with respect to exchangeable debentures in the context of proposed transactions, we encourage you to request an advance income tax ruling.
Robert Gagnon
(613)957-2108
2013-048378
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