27 May 1997 IFA Roundtable Q. 5, 9713180 - WITHHOLDING

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 involuntary dispositions must be listed items of default in order to qualify for the 212(1)(b) exception?

Position:

No.

Reasons:

Should have the same treatment as voluntary dispositions and triggering events.

1997 IFA Conference

Question #5

(a)Would Revenue Canada clarify the scope of the comment at the 1996 Annual Conference of the Canadian Tax Foundation, to the effect that substantial asset dispositions and other circumstances in which a corporate borrower replaces tangible assets with cash, may be the instigation of early compulsory repayment, even if the event is not described as a "default".

(b)What is Revenue Canada's current view with respect to "cash collateralization" of loans to which subparagraph 212(1)(b)(vii) otherwise applies?

Response:

(a)We stated at the 1996 Annual Conference of the Canadian Tax Foundation that we would accept, for purposes of subparagraph 212(1)(b)(vii), circumstances such as, change of control, ratings decline or assets sales as being events of default under a particular loan agreement, although they may not be listed defaults under the terms of the agreement, provided those circumstances were considered "triggering events" which would consequently initiate an offer by the borrower to redeem the debt. Failure to make such an offer under the agreement would constitute a listed event of default for purposes of subparagraph 212(1)(b)(vii).

It is our position that asset sales may include involuntary dispositions. For example, where there has been an involuntary loss or destruction of property resulting in the receipt by the borrower of expropriation or insurance proceeds, such an event need not necessarily be a listed default in and of itself if, under the terms of the agreement, the receipt of the proceeds is considered a "triggering event" requiring an offer to redeem the debt and the failure to make such an offer is a listed event of default.

As stated at the 1996 Annual Conference, we will continue to maintain that in order to be acceptable, the events of failure or default and the triggering events must have commercial reality, must be beyond the control of the lender and must not be contrived.

(b)Our current views on "cash collateralization" of loans to which subparagraph 212(1)(b)(vii) otherwise applies remain as described in paragraph 8 of Interpretation Bulletin IT-361R3 dated February 12, 1996.