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: Whether the CRA could provide any further guidance regarding the application of Part XIII tax in the context of convertible debentures?
Position: No, other than positions stated in previous rulings letters and document 2013-0509061C6.
Reasons: CRA general position stated in CRA document 2013-0509061C6 (Q.9 CRA Round Table at 2013 CTF Conference). The CRA has to review its position (i.e. no excess) concerning the application of subsection 214(7).
2021 CTF Annual Conference
CRA Round Table
Question 16: Convertible Debentures and Part XIII Withholding Tax
In 2010, the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada (“Joint Committee”) made a submission concerning the potential application of Part XIII withholding tax in the context of convertible debentures issued by Canadian resident issuers. In May 2013 (footnote 1) , the CRA indicated that the analysis was substantially advanced but that there was a need to consult with the Department of Finance on the tax policy issues. In November 2013 (footnote 2) , the CRA gave a general update but indicated that it could not provide additional certainty concerning the application of Part XIII tax given “the very broad range of situations in which convertible debentures can be issued”. In addition the CRA indicated that “[t]heir terms and conditions can be complex due to the wide variety of products available in the marketplace, and the particular circumstances and the terms and conditions of the debentures may differ from one situation to another.” Given your experience over the last eight years, can the CRA now provide any further guidance regarding withholding tax in the context of convertible debentures?
CRA Response
In November 2013, the CRA also indicated that the Income Tax Rulings Directorate (“ITRD”) continued to encourage issuers and/or holders of convertible debts to request advance income tax rulings if they have concerns about the application of Part XIII of the ITA to convertible debts in the context of proposed transactions. Provided that a ruling request is received prior to the issuance of the convertible debts, the ITRD will examine the request and the rulings would generally apply prospectively to future regular periodic interest payments, conversions or sales of convertible debts.
However, since November 2013, the ITRD has received only one additional ruling request concerning the application of Part XIII tax to convertible debentures.
ITRD’s Rulings Letters
In November 2013, the CRA provided information concerning a favourable ruling letter (footnote 3) (“Letter 1”). On June 24, 2014, in a letter (footnote 4) of amendments to Letter 1, the ITRD provided two additional rulings and an opinion in respect of the proposed transactions described in Letter 1 (as amended by the letter of amendments).
The additional rulings given provided that:
- For the purposes of paragraph 212(1)(b), any amount deemed to be a payment of interest on a convertible note under subsection 214(7) as a result of a conversion of the convertible note into common shares as described in the relevant proposed transactions, will not be “participating debt interest” within the meaning of the definition in subsection 212(3).
- Any amount deemed to be a payment of interest on a convertible note under subsection 214(7) as a result of a conversion of the convertible note into common shares as described in the relevant proposed transactions, will not be subject to Part XIII withholding tax under paragraph 212(1)(b), provided that PUBCO (i.e. the issuer of the convertible note) deals at arm’s length with ACO (i.e. a non-resident person) at the time of the conversion.
The opinion provided that in the event of a disposition of a convertible note by ACO to a person resident in Canada (other than the issuer) for proceeds of disposition payable in cash, any amount deemed to be a payment of interest on a convertible note under subsection 214(7) would not in general constitute “participating debt interest” within the meaning of the definition in subsection 212(3).
The ITRD issued similar rulings in another rulings letter (footnote 5) . Moreover, the rulings given are applicable to the payment of make-whole amounts as described in the proposed transactions.
The ITRD continues to encourage issuers and/or holders of convertible debts to request advance income tax rulings if they have concerns about the application of Part XIII of the ITA to convertible debts in the context of proposed transactions.
Subsection 214(7) Excess
In response to Q.12 at the CRA Round Table at the May 2009 IFA Seminar (footnote 6) , the CRA said 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).
In its 2010 letter of submissions, the Joint Committee stated that the conversion premium realized on conversion or sale of a convertible debenture would constitute an excess (the amount by which the price for which the obligation was assigned or otherwise transferred exceeds the price for which the obligation was issued) under subsection 214(7).
The CRA has to review its administrative position (i.e. no excess) concerning the application of subsection 214(7) to the conversion of convertible debentures in light of new information available, including the Federal Court of Appeal decision in Agnico-Eagle Mines Limited, 2016 FCA 130. However, we were unable to complete our review in time to provide comments at this round table because of time constraints. When the analysis will be completed, the CRA will share its views with the CTF. Any change of position would be applicable on a prospective basis only.
Definition of “Participating Debt Interest”
The CRA’s view is still that the deemed payment of interest on standard convertible debentures under subsection 214(7) that arises because of a transfer or assignment of standard convertible debentures by a non-resident person to a person resident in Canada (including the issuer of the debenture), does not generally constitute “participating debt interest” (as defined in subsection 212(3)).
Robert Gagnon
2021-091191
November 25, 2021
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 CRA document 2013-0483781C6, Question 9 of May 23, 2013 CRA Round Table at the 2013 IFA International Tax Seminar.
2 CRA document 2013-0509061C6, see also Question 9 of November 26, 2013 “Canada Revenue Agency Round Table” Report of Proceedings of the Sixty-Fifth Tax Conference, 2013 Conference Report (Toronto: Canadian Tax Foundation, 2014), 5:12-15.
3 Rulings letter 2011-0418721R3.
4 Letter of amendments 2014-0532411R3.
5 Rulings letter 2013-0514551R3, amended by letter 2014-0536001R3.
6 CRA document 2009-0320231C6.
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