Principal Issues: Whether subsection 39(3) of the Income Tax Act applies in certain scenarios where bonds are repurchased and whether each constitutes an open market purchase: 1) A debt tender offer where a company makes a public offer to its bondholders to repurchase a predetermined number of bonds at a specified price. 2) In some cases, certain investors will own a significant amount of a particular issuer's bonds. Consider the case where a bond issuer enters into a transaction directly with one or more selected bondholders and agrees to repurchase all or a portion of the issuer's bonds held by the selected investor-holder. 3) Some bonds are callable, with the issuer having a right under certain conditions to redeem the bond prior to its maturity date. Consider an example where an issuer has issued callable bonds and subsequently exercises the call to force the redemption of the bonds.
Position: 1) Generally a tender offer (i.e. an offer which requires an acceptance by the holder in the form of a tender of the relevant obligation by the holder directly to the issuer) is not considered to be an open market repurchase for purposes of subsection 39(3). 2) Generally, a bond repurchase that is negotiated and concluded directly between an issuer and a holder is not considered to be an open market repurchase for purposes of subsection 39(3). 3) Generally, the exercise by the issuer of an early repayment right pursuant to the terms of a bond is not considered to be an open market repurchase for purposes of subsection 39(3).
Reasons: See complete response.