31 May 2023 External T.I. 2022-0944411E5 - Convertible Notes

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 ITRD could provide comments concerning the application of the definition of "participating debt interest" in subsection 212(3) to a Model Convertible Promissory Note?

Position: No.

Reasons: The ITRD does not provide confirmation concerning the tax consequences of convertible debts based on model contracts in the context of technical interpretations.

XXXXXXXXXX									2022-094441
R. Gagnon

May 31, 2023

Dear XXXXXXXXXX:

Re: Model Convertible Promissory Note and Part XIII Tax

This is in reply to your letter dated July 25, 2022, in which you requested our opinion concerning the application of Part XIII tax of the Income Tax Act (“ITA”) to convertible notes as described in the XXXXXXXXXX Model Convertible Promissory Note (which was attached as Appendix A to XXXXXXXXXX letter).

More specifically, you said that the Income Tax Rulings Directorate (“ITRD”) should be able to provide positive comments on the relevant criteria to be used to assess the concept of participating debt interest and confirm that convertible notes as described in the Model Convertible Promissory Note would not attract withholding tax upon conversion.

In your letter, you made references to CRA’s documents 2011-0418721R3 and 2013-0483781C6 (Question 9, May 23, 2013 CRA Round Table at 2013 IFA International Tax Seminar).

Our Comments

The ITRD does not provide confirmation concerning the tax consequences of convertible debts based on model contracts in the context of technical interpretations. The income tax treatment of convertible notes will only be confirmed by the ITRD for particular transactions proposed by specific taxpayers in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

The ITRD noted that the Model Convertible Promissory Note includes a certain number of alternatives or potential variations of convertible notes reflecting a variety of financial terms, XXXXXXXXXX. Therefore, the ITRD believes that it would be too time consuming and possibly unproductive to attempt to determine the tax treatment in respect of all the possible variations of the convertible notes based on the Model Convertible Promissory Note.

The CRA provided additional comments concerning standard convertible debentures and convertible notes issued by public corporations in CRA’s documents 2013-0509061C6 (also published by the Canadian Tax Foundation as Question 9 of CRA Round Table in Report of the Proceedings of the Sixty-Fifth Tax Conference, 2013 Conference Report) and 2021-0911911C6 (Question 16 of CRA Round Table at the 2021 Canadian Tax Foundation Annual Conference).

However, our understanding is that the provisions of standard convertible debentures issued by publics corporations are in general noticeably different than the provisions of the Model Convertible Promissory Note.

In its response to question 16 (Convertible Debentures and Part XIII Withholding Tax) of the CRA Round Table at the 2021 CTF Annual Conference, the CRA specifically stated that 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.

We apologize for the delay in responding to your request.

Yours truly,

Urszula Chalupa, LL.B, M. Fisc.

for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

UNCLASSIFIED