16 December 1997 External T.I. 9732275 - NON-RESIDENT WITHHOLDING ON DEBT OBLIGATION

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 ISSUE:

Whether 212(3) applies to first and subsequent replacement obligations or only to the first.

Position:

Applies to first and subsequent replacements.

Reasons:

Wording is not restricted to only one replacement obligation - where an obligation is issued in exchange or substitution, provided the conditions are satisfied, 212(3) will apply to deem the new obligation to be issued at the time the original (i.e. the first one, not the one being replaced) obligation was issued.

973227
XXXXXXXXXX P. Spice

Attention: XXXXXXXXXX

December 16, 1997

Re: Subsection 212(3) of the Income Tax Act (the “Act”)

This is in reply to your fax of December 8, 1997, in which you ask whether the above-noted provision will apply to a subsequent replacement obligation. Provided certain financial difficulty and other conditions are met, subsection 212(3) of the Act deems an obligation (the “replacement obligation”) issued in exchange or substitution for an obligation (the “former obligation”) to be issued when the former obligation was issued. Thus, the minimum five year period during which no more than 25% of the principal amount may be required to be repaid does not start anew for the replacement obligation for purposes of subparagraph 212(1)(b)(vii) of the Act.

It is our view that subsection 212(3) of the Act will apply to the first and subsequent replacement obligations where the conditions in paragraphs (a) through (c) of that provision are satisfied at the relevant time of exchange or substitution. Note that paragraph 212(3)(c) of the Act refers to the requirement that all interest on the “former obligation” was exempt from Part XIII tax because of subparagraph 212(1)(b)(vii) of the Act. Where the situation involves a subsequent replacement obligation, it is the obligation which is being replaced, and not the original obligation, which must be examined to determine if this condition is met. Where subsection 212(3) of the Act applies, each subsequent replacement obligation will be deemed to be issued when the original obligation was issued.

Although the foregoing comments are not binding on the Department, we trust they assist.

Yours truly,

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