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: 1. Whether an amendment to a debt obligation to extend its term for a commercially reasonable period would result in the loss of the transitional relief available for RCA prohibited investments acquired before March 29, 2012? 2. Whether a partial payment of a debt at maturity would result in the loss of the relief for the remaining balance?
Position: 1. No, provided (i) the debt obligation has not yet been settled, (ii) the amendment is made in 2013, and (iii) the new amortization period is consistent with the other terms of the debt obligation, the whole of which establish commercially reasonable payments of principal and interest at least annually. 2. No, provided (i) the existing debt is not fully extinguished, and (ii) the remaining balance of the debt is subject to commercial terms.
Reasons: Falls within the scope of the transitional rule that accommodates modifications to debt obligations to provide for commercial normalcy.
XXXXXXXXXX
2013-050194
D. Wurtele
October 29, 2013
Dear XXXXXXXXXX:
Re: RCA transitional rule
This is in reply to your letter of August 20, 2013 concerning retirement compensation arrangements (RCAs).
You asked us to confirm that the relief afforded by the transitional rule that applies to certain debt obligations acquired by an RCA before March 29, 2012 would not be lost in two situations. The first is where an amendment is made to a debt obligation to extend its term for a commercially reasonable period (together with other amendments to establish commercially reasonable security, interest, and repayment terms). The second situation is where, on maturity, the debtor pays a portion of the debt to reduce the outstanding principal owed to the RCA, and new commercial terms are renegotiated in 2013 for the remaining balance.
Our comments
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation. It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination. The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
Part XI.3 of the Income Tax Act (the "Act") was recently amended to introduce anti-avoidance rules for RCA advantages and prohibited investments. These rules apply after March 28, 2012, subject to two exceptions for property acquired on or before that date. One of these exceptions ensures that the retention of a promissory note or similar debt obligation by an RCA will not cause the advantage tax to apply provided commercially reasonable payments of principal and interest are made at least annually after 2012 and no RCA strip occurs. For the purpose of these rules, an amendment to the terms of a debt obligation to provide for such payments is deemed not to be a disposition or acquisition of the debt obligation. As we noted in 2012-0470181, the amendment to establish commercial terms may be made at any time before the end of 2013, provided the total payments of principal and interest made for 2013 reflect a commercially reasonable total for the entire year.
In our view, an amendment to extend the term of a debt obligation for a commercially reasonable period will not cause the transitional relief to cease to apply, provided (i) the debt has not yet been settled or extinguished, (ii) the amendment is made in 2013, and (iii) the new amortization period is consistent with the other terms of the debt obligation, the whole of which establish commercially reasonable payments of principal and interest at least annually.
It is also our view that the partial payment of a debt at maturity would not result in the loss of the transitional relief for the remaining balance, provided (i) the existing debt is not fully extinguished, and (ii) the remaining balance of the debt is subject to commercial terms that comply with the requirements of the transitional rule.
We trust our comments will be of assistance.
Yours truly,
Mary Pat Baldwin, CPA, CA
for Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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