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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
Whether a particular anti-dilution clause would preclude the application of the 212(1)(b)(vii)(E) exemption to withhold tax.
Position TAKEN:
The anti-dilution clause would taint the exemption and interest on the obligation would be subject to withholding tax.
Reasons FOR POSITION TAKEN:
Reading of the broad wording in the legislation (i.e. "...may not under any circumstances...") and consistent with previous positions taken (August 20, 1991 memo - file #912180; July, 1991 memo - file #910431). Also consistent with our position concerning early repayments in the event of death (prior to the enactment of clause 212(1)(b)(vii)(F)).
951733
XXXXXXXXXX Allan Nelson
Attention: XXXXXXXXXX
August 25, 1995
Dear Sirs:
Re: Subparagraph 212(1)(b)(vii) of the Income Tax Act
Convertible Debentures With Anti-Dilution Clause
Request for a Technical Opinion
This is in reply to your letter dated June 30, 1995, wherein you asked us to confirm that a particular anti-dilution clause would not preclude the application of the withholding tax exemption in clause 212(1)(b)(vii)(E) of the Act.
The anti-dilution clause in question provides that in the event of a change in a corporation's share capital (a "Reorganization"), the debenture holders would become entitled to receive the same amount of shares and other securities or property which they would have been entitled to receive, pursuant to the terms of the Reorganization, had they converted their debentures to common shares, immediately prior to the Reorganization.
It is the practice of this Department not to comment on such matters, when the identities of the taxpayers and all of the relevant facts are not known. However, we can provide you with the following comments which we hope will be of assistance to you.
Generally speaking, in order to meet the withholding tax exemption provided in subparagraph 212(1)(b)(vii) of the Act, a corporation cannot, under any circumstances, be obliged, pursuant to the terms of the obligation, or any agreement relating thereto, to pay more than 25% of the principal amount of the obligation within 5 years from the date of issue. Clause 212(1)(b)(vii)(E) provides an exception to this rule where the exemption requirements would not otherwise be met because of the debtor's possible obligation to repay more than 25% of the principal amount of the obligation if and when the holder exercised its option to convert the obligation into shares of the debtor. Clause (E) applies where the obligation is convertible into a prescribed security.
In a scenario where the debentures are convertible only into prescribed securities, but pursuant to the terms of the obligation there is a anti-dilution clause that provides, in the event of a Reorganization, the debentures may become convertible into non-prescribed securities, it is our view that 1) the debtor may at some time become obliged to pay more than 25% of the principal amount of the obligation within 5 years from the date of issue. Therefore, subject to the application of clause 212(1)(b)(vii)(E) (assuming clauses (C), (D), or (F) do not apply), withholding tax would be exigible in respect of interest payments made to the non-resident holder, and 2) because it is possible the debentures will become convertible into something other than prescribed shares, the anti-dilution clause would disqualify the debentures from meeting the exemption requirements in clause 212(1)(b)(vii)(E) of the Act.
The opinions expressed in this letter do not constitute an advance income tax ruling and, as stated in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.
Yours truly,
Chief
Leasing and Financing Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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