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.
July 8, 1988
HEAD OFFICE Rulings Directorate Financial Industries Division Peter Lee (613)957-2745 SUBJECT: XXXX (the "Company") Debenture Discount and Gold Purchase Warrants
We are writing in reply to your memorandum of December 10, 1987 wherein you requested our opinions on the allocation of proceeds between the debenture and the Gold Purchase Warrants issued by the Company, and on the amortization of the debenture discount (the "Discount").
Background and Facts
1. The Company is an Ontario company and a taxable Canadian corporation.
XXXX
Your Opinions
8. In your view, the proceeds of issuing the Warrants constitute income in the period during which the Debenture was sold. You also disagree with the Company's contention that if the proceeds received in respect of the Warrants are regarded as income, the Company will be entitled to a reserve pursuant to paragraph 20(1)(m) of the Act.
9. In your view, the Discount will be deductible only when it is actually paid pursuant to paragraph 20(1)(f) of the Act.
Our Opinions
10. You did not request our opinions on whether the allocation of proceeds of issuing the debenture units between the Debenture and the Warrants is reasonable and we do not comment on it.
11. We agree with your views stated in paragraphs 8 and 9 above.
12. In our view, the Discount on the interest-bearing Debenture is not considered to be interest for the purposes of the Act. An amount will be characterized as interest if the following criteria are met (Miller v. The Queen, 85 DTC 5354):
(a) the amount represents compensation for the use of borrowed money (b) the amount is referable to the principal amount of borrowed money (c) the amount accrues from day to day.
With respect to the comments in paragraph 3 of Interpretation Bulletin 114, we are not prepared to concede that the interest rate of the Debenture is substantially lower than the market rate at the time of issue.
In our view, the Discount cannot be amortized and deducted from income because they are denied by virtue of paragraph 18(1)(f) of the Act. But when the Discount is actually paid, it is deductible from income pursuant to subparagraph 20(1)(f)(ii) of the Act.
13. Pursuant to subsection 49(1) of the Act, the granting of the Warrants is deemed to be a disposition of the properties with an actuated cost base for each property immediately before the grant equal to nil. The gain on disposition of the Warrants may be either on capital account or on income account. In our view, it is on income account. Selling gold at a fixed price at a future date is a part of, incidental to, or pertaining to the Company's ordinary business. Therefore selling the Warrants, which entitle the holder to buy gold at a price equivalent to US $460 per ounce before April 16, 1989 is considered to be a part of, incidental to, or pertaining to the Company's ordinary business. You may want to refer to the court cases of Atlantic Sugar Refineries v. Minister of National Revenue (49 DTC 602) and Western Leaseholds Limited v. Minister of National Revenue, (59 DTC 1316), and our policy in respect of commodities in Interpretation Bulletin 346R.
14. In order to determine whether subsection 9(1) or paragraph 12(1)(a) of the Act will apply, one has to determine whether the amount received has the quality of income (Burrard Yarrows v. the Queen, 86 DIC 6459). The Company la absolutely entitled to the proceeds of issuing the Warrants, irrespective of whether the Warrants will be exercised or not. When a holder of the Warrants decides to exercise the right to buy gold, the holder must pay a delivery fee equal to 1% of the current market value of gold and a gold purchase price equivalent to US $460 Per ounce. In our view, the proceeds receives by the Company in respect or the Warrants have the quality of income, and subsection 9(1) rather, than paragraph 12(1)(a) of the Act is applicable. If an amount is not included in income pursuant to paragraph 12(1)(a) of the Act, a reserve under paragraph 20(1)(m) of the Act is not allowed.
We hope that the above-noted views are helpful to you.
Rosa Kauffman Chief Leasing & Financing Section Financial Industries Division Rulings Directorate
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