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.
5-953228
XXXXXXXXXX M. Séguin
(613) 957-8953
Attention: XXXXXXXXXX
February 13, 1996
Dear Sirs,
This is in response to your letter dated November 28, 1995 wherein you request our opinion concerning the interpretation of section 51.1 of the Income Tax Act (the "Act").
You would like to know if the reference to "principal amount" in the phrase "the principal amount of the new obligation is equal to the principal amount of the convertible obligation" in paragraph 51.1(c) of the Act means the principal amount as expressed in Canadian dollars, or whether section 51.1 of the Act could apply in respect of an exchange of a U.S. dollar convertible debenture for a new U.S. dollar debenture having the same principal amount expressed in U.S. funds. For the purposes of our analysis, you ask us to assume that the currency exchange rate has fluctuated.
In order for section 51.1 of the Act to apply, one of the conditions to be met, under subsection 51.1(c) of the Act, is that the principal amount of the new obligation be equal to the principal amount of the convertible obligation.
Subsection 248(1) of the Act defines "principal amount", in relation to any obligation, to mean the amount that, under the terms of the obligation or any agreement relating thereto, is the maximum amount or maximum total amount payable on account of the obligation by the issuer. In order to establish the principal amount of an obligation, we must look at the amount of the obligation in the currency in which it must be repaid under the terms of the obligation. The principal amount of an obligation that must be repaid in U.S. dollars should accordingly be expressed in U.S. dollars. Therefore, section 51.1 of the Act could apply in respect of an exchange of obligations issued in a foreign currency.
Yours truly,
for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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