7 July 1996 Income Tax Severed Letter 9613683 - Early repayment of debt, withholding tax on interest

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 bonus paid on early repayment of a debenture qualifies for the exemption under 212(1)(b)(vii)

POSITION:

Yes

REASONS:

The payment qualifies under the provisions of 18(9.1) provided that there is no substitution of debt. Consequently, the payment is deemed by paragraph (e) to be a payment of interest for purposes of the Act. Since the payment becomes payable once a majority of the holders accept the offer, it will be considered as a payment of interest payable for purposes of 212(1)(b)(vii).

XXXXXXXXXX 961368

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: XXXXXXXXXX

This is in reply to your letters of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.

To the best of your knowledge, none of the issues raised in the present request have been or are being considered by a District Taxation Office or Taxation Center in connection with a tax return already filed. Furthermore, none of the issues raised in the present request are under objection or in discussion with an official of Revenue Canada.

Our understanding of the statement of facts and proposed transactions is as follows:

Facts and Proposed Transactions

1. XXXXXXXXXX is a public corporation and a taxable Canadian corporation within the meaning of subsection 89(1) of the Income Tax Act (Canada) ("Act").

2. XXXXXXXXXX is a resident of Canada for the purposes of the Act.

3. XXXXXXXXXX federal corporate account number is XXXXXXXXXX and its filing district is XXXXXXXXXX

4. XXXXXXXXXX outstanding indebtedness includes XXXXXXXXXX% Notes due XXXXXXXXXX and XXXXXXXXXX% Notes due XXXXXXXXXX (collectively the "Notes") which are held primarily by persons who are non- residents of Canada and who deal at arm's length with XXXXXXXXXX for purposes of the Act. It is represented that the interest payable on the Notes qualifies for the withholding tax exemption provided for in subparagraph 212(1)(b)(vii) of the Act with respect to interest paid to the non- resident holders (the "Noteholders").

5. XXXXXXXXXX

8. XXXXXXXXXX is offering to purchase for cash its Notes.

9. XXXXXXXXXX

10. XXXXXXXXXX

11. XXXXXXXXXX

12. XXXXXXXXXX

Purpose of Proposed Transactions

XXXXXXXXXX proposes to reduce the amount of its XXXXXXXXXX indebtedness by repurchasing its XXXXXXXXXX indebtedness XXXXXXXXXX years. Since XXXXXXXXXX does not have a redemption privilege pursuant to the XXXXXXXXXX Indentures, XXXXXXXXXX has made an offer to purchase the Notes at a premium. XXXXXXXXXX

Ruling

Provided the above statements of facts and proposed transactions constitute complete and accurate disclosure of all the relevant facts and proposed transactions, we rule as follows:

A. Provided that the Excess Amount cannot reasonably be considered to have been made in respect of the substitution of the Notes into another debt obligation, to the extent that the payment by XXXXXXXXXX of the Excess Amount can reasonably be considered to relate to, and does not exceed the value at that time of an amount that but for the repayment of the Notes would have been paid or payable by XXXXXXXXXX as interest on the Notes for a taxation year ending after that time, the payment of the Excess Amount will be subject to the provisions of subsection 18(9.1) and paragraph 18(9.1)(e) of the Act will accordingly deem the Excess Amount to be paid by XXXXXXXXXX and received by the Noteholders as interest payable on the debt obligation for purposes of subparagraph 212(1)(b)(vii) of the Act.

The above ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R2 issued on September 28, 1990, and is binding on Revenue Canada, Taxation provided that the proposed transactions are completed before XXXXXXXXXX The above ruling is based on the Act in its present form and does not take into account any proposed amendments thereto.

Except as expressly stated herein, our ruling does not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. Specifically, our ruling does not confirm in any way the eligibility for the exemption from withholding tax, contained in subparagraph 212(1)(b)(vii) of the Act, of any interest paid to the Noteholders. Further, we are not providing any comments as to whether the amendments to the XXXXXXXXXX Debenture and the XXXXXXXXXX Debenture will result in new indebtedness for purposes of subparagraph 212(1)(b)(vii) of the Act.

Yours truly,

for Director Financial Industries Division Income Tax Rulings and Interpretations Directorate Policy and Legislation Branch