27 November 1996 CTF Roundtable, 9636670 - EVENT OF DEFAULT

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:

change of control whether acceptable event of default even though not a listed event.

Position:yes

Reasons:reasonable

CTF 1996

Clause 212(1)(b)(vii)(C)

Subparagraph 212(1)(b)(vii) provides an exemption from withholding tax on interest on arm's length debt paid to a non-resident where the debtor may not under any circumstances be obliged to repay more than 25% of the principal within 5 years of the date of issue of the debt.

Clause 212(1)(b)(vii)(C) provides an exception to the 5 year rule if the requirement to repay arose from an event of a failure or default under the terms of that indebtedness or any agreement relating thereto.

The Department has previously issued favourable rulings involving situations where lenders have included a provision in their loan agreements stating that it is an "event of default" (and therefore the principal amount of the loan becomes due) if there is a change in control of the borrower.

Those situations were followed by requests to give advance rulings in situations where the change of control would not be a listed "event of default" in the loan documents, but rather the change of control would initiate a "triggering event" whereby the corporate borrower would be obligated to offer to redeem the notes ("change of control offer"). Failure by the corporation to make "the change of control offer" pursuant to the "triggering event" would constitute a listed event of default under the agreement for purposes of 212(1)(b)(vii). The reason given for this arrangement was that the borrower wished to avoid "cross defaults" on other loans. Favourable rulings were issued in these circumstances.

The Department has recently reconsidered its position pertaining to the exemption found in Clause 212(1)(b)(vii)(C) and has concluded that it will maintain the status quo and continue to accept circumstances such as, change of control, ratings decline or asset sales as being events of failure or default under a particular loan agreement although they may not be listed defaults under the terms of the agreement.

However, the Department will continue to maintain that in order to be acceptable, the events of failure or default must have commercial reality, must be beyond the control of the lender and must not be contrived.