30 November 1995 Ruling 9638023 - XXXXXXXXXX

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:

Interest deduction - whether the method of determining the interest rate would make this a participating loan.

Position:

No

Reasons:

Although the interest rate is based on a formula which is based upon profits for prior years, the rate is prospective in nature, is payable in respect of a year whether or not there are profits and is referable to a principal amount. This is not a participating loan.

XXXXXXXXXX							963802
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: XXXXXXXXXX

We are writing in response to your correspondence of XXXXXXXXXX wherein you had requested an advance income tax ruling on behalf of XXXXXXXXXX We also acknowledge our (XXXXXXXXXX) telephone conversation with respect to this matter.

You have advised that the corporate account number of XXXXXXXXXX, that XXXXXXXXXX files its return of income with the XXXXXXXXXX Taxation Services Office of Revenue Canada and that, to the best of the knowledge of yourself and that of XXXXXXXXXX, none of the issues involved in this advance income tax ruling has or is being considered by an office of Revenue Canada in connection with an income tax return previously filed and that none of the issues being considered in the context of this ruling is the subject of a notice of objection or is under appeal.

Statement of Facts

1.XXXXXXXXXX is a "taxable Canadian corporation" as that term is defined in subsection 89(1) of the Income Tax Act (the "Act").

2.XXXXXXXXXX is a XXXXXXXXXX corporation and is an indirect subsidiary of XXXXXXXXXX, a XXXXXXXXXX corporation.

3.XXXXXXXXXX is a wholly owned subsidiary of XXXXXXXXXX.

4.XXXXXXXXXX has indebtedness outstanding to XXXXXXXXXX in a principal amount of approximately $XXXXXXXXXX.

Proposed Transactions

5.XXXXXXXXXX will borrow up to $XXXXXXXXXX from XXXXXXXXXX pursuant to a subordinated debenture (the "Debenture"). The Debenture will have a term to maturity of XXXXXXXXXX years and the outstanding principal amount will be repayable on XXXXXXXXXX.

6.The Debenture will bear interest annually, payable on XXXXXXXXXX of each year (the "Payment Date"), on the daily outstanding principal amount at an annual rate (the "Applicable Rate") equal to XXXXXXXXXX.

For the purpose of the above calculation,

(i)the term "Related Adjusted Net Income" means, with respect to any Payment Date, the Adjusted Net Income of XXXXXXXXXX for the most recently ended fiscal period of XXXXXXXXXX ending on or prior to the immediately preceding Payment Date or, in the case of the first Payment Date, ending on XXXXXXXXXX;

(ii)the term "Related Average Adjusted Net Income" means, with respect to any Payment Date, the sum of the Adjusted Net Income of XXXXXXXXXX for each of the three most recently completed fiscal years of XXXXXXXXXX ending on or prior to the immediately preceding Payment Date or, in the case of the first Payment Date, ending on XXXXXXXXXX; and

(iii)the term "Adjusted Net Income" means, with respect to any fiscal year of XXXXXXXXXX, the consolidated net income of XXXXXXXXXX for such year, calculated in accordance with generally accepted accounting principles, plus all amounts deducted in the calculation thereof on account of interest under the Debenture less the amount by which the taxes payable by XXXXXXXXXX are reduced by reason of the deduction on account of interest under the Debenture.

7.Interest under the Debenture will be calculated and payable in Canadian dollars in arrears on each Payment Date, both before and after maturity, default and judgment, with interest on overdue interest at the same rate until paid. If the interest accrued under the Debenture during the fiscal year of XXXXXXXXXX ending on any Payment Date exceeds the Adjusted Net Income for the fiscal year ending on the Payment Date, or exceeds the maximum interest permitted to be paid by XXXXXXXXXX on such Payment Date in accordance with restrictions imposed on XXXXXXXXXX by any lender XXXXXXXXXX, then, notwithstanding the preceding sentence, interest equal to the amount of such excess ("Deferred Interest") shall not be paid on such Payment Date but, instead, shall be paid on any subsequent Payment Date with respect to (and to the extent that) the Adjusted Net Income for the fiscal period of XXXXXXXXXX ending on the subsequent Payment Date exceeds the sum of the interest (other than Deferred Interest) payable under the Debenture on such Payment Date and any prior Deferred Interest payable on such subsequent Payment Date, provided that payment on such subsequent Payment Date is in accordance with restrictions imposed on XXXXXXXXXX by any lender XXXXXXXXXX.

Deferred Interest shall be paid on any Payment Date in the order in which such Deferred Interest arose.

Any Deferred Interest that has not been paid prior to XXXXXXXXXX must be paid at such time.

8.In the event that an interest payment on the Debenture remains unpaid at the end of the second taxation year of XXXXXXXXXX following the taxation year in which the interest expense was incurred, XXXXXXXXXX may file an agreement pursuant to paragraph 78(1)(b) of the Act in prescribed form on or before the day on which XXXXXXXXXX is required by section 150 of the Act to file its return of income for the third succeeding taxation year such that the amount so unpaid will, pursuant to paragraph 78(1)(b) of the Act, be deemed to have been paid by XXXXXXXXXX and to have been received by XXXXXXXXXX on the first day of that third taxation year and XXXXXXXXXX will be deemed to have made a loan to XXXXXXXXXX on the first day of that third taxation year in an amount equal to the amount so unpaid.

Purpose of the Proposed Transactions

The funds borrowed under the proposed structure will be used to either retire existing corporate indebtedness ("Existing Indebtedness") or to return paid-up capital on the shares of XXXXXXXXXX owned by XXXXXXXXXX The participating feature of the Debenture will enable XXXXXXXXXX to receive a return on the loaned funds while protecting XXXXXXXXXX and its existing senior lenders in the event that Adjusted Net Income of XXXXXXXXXX declines over a sustained period.

Ruling Provided

Provided that the preceding statements are accurate and complete and the proposed transactions are carried out as described above, we confirm the following:

Provided that the funds borrowed by XXXXXXXXXX under the Debenture are used by XXXXXXXXXX for the purpose of earning income from a business or property (other than to acquire property the income from which would be exempt or to acquire a life insurance policy) in a year, the amount paid or payable in respect of that year (depending upon the method regularly followed by XXXXXXXXXX in computing its income) or a reasonable amount in respect thereof, whichever is lesser, will, subject to the provisions of subsection 18(4) of the Act, be deductible pursuant to paragraph 20(1)(c) of the Act by XXXXXXXXXX in computing its income for income tax purposes in respect of the year.

This ruling is provided subject to the limitations and qualifications set out in Information Circular 70-6R2 issued by Revenue Canada on September 20, 1990 and is binding upon the Department provided that the proposed transactions are completed by XXXXXXXXXX This ruling is based on the Act and the Income Tax Regulations in their present form and does not take into account the effects of any proposed amendments thereto.

Yours truly,

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