7 July 1998 Income Tax Severed Letter 9802143 - Repayment of indebtedness 18(9.1) on refinancing

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.

SUMMARY: Repayment of indebtedness 18(9.1) on refinancing—ITA-20(1)(c), 18(9.1), 212(1)(b)(vii)—Advance income tax ruling - Various tax issues relating to the repayment of indebtedness (bonds and debentures) during a refinancing transaction.

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: 1. Is the “Premium” on the bonds and the debentures not simply an inducement payment to which 12(1)(x) would apply in the hands of the recipient? 2. Can the Premium reasonably be considered to have been made by Opco in respect of the “substitution or conversion” of a debt obligation (Existing Bonds and Debentures) to another debt obligation (New Bonds)? 3 Does the Premium constitute a penalty or bonus payable by Opco because of the repayment by Opco for purposes of 18(9.1)(d)? 4. Will the Amendments to the Bond indenture and the Debenture indenture result in a “disposition” of property?

POSITION TAKEN: 1. No. 2. No. 3. No 4. None. This is a question of fact.

REASONS FOR POSITION TAKEN: 1. Where subsection 18(9.1) applies, the payment is deemed for the purposes of the Act to have been paid and received at that time as interest on the debt obligation such that 12(1)(x) would not apply to the payment 2. “Substitution”, for purposes of subsection 18(9.1), does not include payments made to buydown an interest rate or, bonus or penalty payments made to prepay the principal of a debt obligation in situations where the debtor has parted with something such that there has been a “performance of obligation” and that the performance involves an actual payment (not a promise to pay in the future) by the debtor. 3. We concluded, on the facts of the present case, that the Premium is a “bonus” payable because of the repayment by Opco such that the conditions set out in paragraph 18(9.1)(d) were met. 4. Consideration must be given to all changes to the existing debts. The applicant withdrew the request for this particular ruling prior to submitting all the necessary information. Consequently, a proviso was inserted in the ruling to the effect that we were not providing any comments as to whether the amendments would constitute a disposition

XXXXXXXXXX 980214 XXXXXXXXXX Attention: XXXXXXXXXX XXXXXXXXXX, 1998 Dear Madam: Re: Advance Income Tax Ruling XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided in subsequent correspondence, in a meeting and during our various telephone conversations in connection with your request (XXXXXXXXXX). We understand that to the best of your knowledge and that of the taxpayers involved: i) none of the issues involved in the requested ruling is being considered by any District Tax Services Office or Taxation Centre of the Department in connection with a tax return already filed, and

ii) none of the issues involved in the requested ruling is the subject of any notice of objection or is under appeal.

Unless otherwise stated, all references to a statute are to theIncome Tax ActR.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”) and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. Our understanding of the facts and proposed transactions is as follows: FACTS 1. XXXXXXXXXX (“Opco”) was incorporated under the laws of XXXXXXXXXX and is a public corporation and a taxable Canadian corporation. OPCO's taxation year ends on XXXXXXXXXX. The expressions “public corporation” and “taxable Canadian corporation” as referred to here and subsequently have the meanings assigned by section 89(1) of the Act.

The authorized share capital of Opco consists of an unlimited number of voting common shares.

The issued and outstanding share capital of Opco consists of XXXXXXXXXX common shares. The common shares of Opco and Debentures, as described in paragraph 2 hereunder, are traded on the XXXXXXXXXX Exchange, as a unit (the “Unit”) consisting of XXXXXXXXXX common shares and a $XXXXXXXXXX subordinated convertible debenture (the “Debenture”). XXXXXXXXXX A “Change of Control Triggering Event” is defined in the Debenture Trust Indenture (which governs the Debentures), as an event or series of events by which a person becomes the beneficial owner of XXXXXXXXXX % or more of all common shares of Opco then outstanding. 2. The Debentures bear interest at a rate of XXXXXXXXXX % per annum XXXXXXXXXX all interest payable semi-annually in arrears, XXXXXXXXXX. The Debentures are unsecured. The Debentures mature on XXXXXXXXXX and are not redeemable by Opco prior to maturity, except as required following the occurrence of a Change of Control Triggering Event. Opco has the right to purchase the Debentures in the market or by tender offer to all holders at any price. A $XXXXXXXXXX Debenture is convertible, on or after XXXXXXXXXX, into common shares at a conversion price of $XXXXXXXXXX per common share, subject to adjustment. Opco's outstanding indebtedness in the form of Debentures is $XXXXXXXXXX. 3. In addition to the Debentures described in paragraph 2 above, Opco has outstanding indebtedness in the form of $XXXXXXXXXX of XXXXXXXXXX Bonds (the “Existing Bonds”). The Existing Bonds bear interest at a rate of XXXXXXXXXX % per annum, payable semi-annually in arrears. The Existing Bonds are secured by a fixed and floating charge and security interest on all the assets of Opco. The Existing Bonds mature on XXXXXXXXXX and may be redeemed by Opco any time after XXXXXXXXXX at a redemption price equal to the greater of (i) the principal amount thereof and (ii) the “Canada Yield Price” plus XXXXXXXXXX %. The “Canada Yield Price” is defined in the Bond Trust Indenture (which governs the Existing Bonds) as a yield to maturity equal to the yield to maturity which a non-callable Government of Canada Canadian dollar bond would carry if issued at 100% of its principal amount on such date with a term to maturity equal to the remaining term to maturity of the Existing Bonds. Opco will be required to redeem the Existing Bonds following the occurrence of a “Change of Control Triggering Event”. A “Change of Control Triggering Event” is defined in the Bond Indenture (which governs the Bonds) as an event or series of events by which a person becomes the beneficial owner of XXXXXXXXXX % or more of all common shares of Opco then outstanding. The Existing Bonds are listed on the XXXXXXXXXX Exchange.

4. Under the Bond Indenture, any proposal to waive, modify or otherwise amend any covenants (other than a forgiveness of principal or interest or to waive, modify or amend the manner and time of payment or the rate of interest which requires the unanimous approval of all holders of Existing Bonds) or events of default (as defined in the Bond Trust Indenture) must be approved by extraordinary resolution passed at a meeting of holders of Existing Bonds, at which holders of more than XXXXXXXXXX % of the principal amount of Existing Bonds are present, by the affirmative vote of holders representing not less than XXXXXXXXXX % of the principal amount of Existing Bonds represented at the meeting and voted thereon, or by instruments in writing signed by holders representing not less than XXXXXXXXXX % of the principal amount of all outstanding Existing Bonds (the “Existing Bond Amendment Clause”).

5. Under the Subordinated Debenture Indenture, any proposal to waive, modify or otherwise amend any covenants (other than a forgiveness of principal or interest on the Debentures or to waive, modify or amend the manner and time of payment or the rate of interest on the Debentures which requires the unanimous approval of all holders of Debentures) or events of default (as defined in the Subordinated Debenture Indenture) must be approved by extraordinary resolution passed at a meeting of holders of Debentures at which holders of more than XXXXXXXXXX % of the principal amount of Debentures are present, by the affirmative vote of holders representing not less than XXXXXXXXXX % of the principal amount of Debentures represented at the meeting and voted thereon, or by instruments in writing signed by holders representing not less than XXXXXXXXXX % of the principal amount of all outstanding Debentures and , in addition, there may be no such waiver, modification or other amendment to the terms and consequences of a Change of Control Triggering Event without the prior consent of the Bond Trustee (the “Debenture Amendment Clause”)

6. The holders of the Existing Bonds and the Units include Canadian residents and non-residents that are either individuals or corporations.

XXXXXXXXXX

Some of the holders of the Existing Bonds and Units are, or may be, financial institutions for purposes of Part I of the Act. The Existing Bonds and the Debentures will be a specified debt obligation to such financial institutions, unless the specified debt obligations are considered a mark-to-market property. The expressions “financial institution”, “specified debt obligation” and “mark-to-market property” have the meanings assigned by subsection 142.2(1) of the Act.

7. Opco has, in computing it's income for it's preceding taxation years, deducted the interest payable on the Existing Bonds and the Debentures under subparagraph 20(1)(c)(ii) of the Act.

8. Interest payable on the Existing Bonds and Debentures to non-residents of Canada is exempt from withholding tax pursuant to subparagraph 212(1)(b)(vii) of the Act.

9. Opco's sole asset is a substantial economic interest in XXXXXXXXXX Opco also holds a 50% undivided ownership interest in XXXXXXXXXX.

10. XXXXXXXXXX

11. Current interest rates are lower than the interest Opco is presently paying on its Existing Bonds and Debentures. The XXXXXXXXXX value of Opco's interest in XXXXXXXXXX has increased since Opco acquired the asset in XXXXXXXXXX.

PROPOSED TRANSACTIONS 12. Opco proposes to raise up to $XXXXXXXXXX by way of a public offering of new first XXXXXXXXXX bonds (the “New Bonds”) and to use proceeds therefrom to repay the Existing Bonds and the Debentures. Towards this end, the transactions described hereunder will be carried out in the following order.

13. An Existing Bond holders meeting will be held following receipt of a favorable advance ruling to consider and vote upon an extraordinary resolution (the Bond Holders Resolution”) to amend the Bond Trust Indenture.

14. The Bond Holders Resolution will provide that the following amendments be made to the terms and conditions set out in the Bond Trust Indenture.

i) Security provisions Delete the security provisions in articles XXXXXXXXXX. These amendments will delete the Existing Bonds first ranking security interest so that the Existing Bonds will rank behind the New Bonds to be issued;

ii) Change of control trigger Delete the change of control trigger (section XXXXXXXXXX) as described in paragraph 3 above;

iii) Tender offer Amend sectionXXXXXXXXXX to permit the tender offer to be made;

iv) Covenants deleted Delete the security provisions in sections XXXXXXXXXX. Since the security provisions in articles XXXXXXXXXX are to be deleted, these provisions would correspondingly be deleted.

v) Covenants modified Modify articles XXXXXXXXXX. These provisions need to be modified to permit the issue of the new debt and the tender offer by Opco.

15. A Debenture holders meeting will be held following receipt of a favorable advance ruling to consider and vote upon an extraordinary resolution (the Debenture Holders Resolution”) to amend the Subordinated Debenture Indenture.

16. The Debenture Holders Resolution will provide that the following amendments be made to the terms and conditions set out in the Subordinated Debenture Indenture.

i) Unstaple the Units Delete the trading restriction in section XXXXXXXXXX so that the Debentures and the common shares of Opco can each be dealt with and traded separately;

ii) Conversion privilege Delete the conversion privilege in article XXXXXXXXXX.

iii) Change of control trigger Delete the change of control trigger (section XXXXXXXXXX) as described in paragraph 5 above;

iv) Tender offer Amend section XXXXXXXXXX to permit the tender offer to be made;

v) Covenants modified Modify sections XXXXXXXXXX. These provisions must be modified to permit the issue of the new debt and the tender offer by Opco.

17. Following the approval of the Debenture Holders Resolution and the subsequent “unstapling” of the Units it is anticipated that the Debentures and common shares of Opco will trade separately on the market for a period prior to the closing of Opco's tender offer (described in paragraph 20 hereunder) to repay the Debentures

18. Subject to the approval of the Bond Holders Resolution by the Existing Bond holders and the approval of the Debenture Holders Resolution by the Debenture holders (and the Bond Trustee in regards to the amendment to the Change of Control Triggering Event provision in the Debenture Indenture), Opco will issue the New Bonds XXXXXXXXXX. The New Bonds will not be listed on the XXXXXXXXXX Exchange.

19. Following the completion of the transactions described above, Opco will make a cash tender offer to each Existing Bond Holder (the “Existing Bond Offer”) to repay the Existing Bonds. Included in the Existing Bond Offer will be a premium over the principal amount (the “Existing Bond Offer Premium”) which will be paid on the early retirement of the Existing Bonds. You have indicated that since the Existing Bonds are not redeemable the Bond Offer Premium is being offered in order to induce holders to accept Opco's Existing Bond Offer. The amount of the Existing Bond Offer Premium to be paid in respect of each of the Existing Bonds relates to, and does not exceed, the value at the time of the payment of the amount that, but for the repayment, would have been paid or payable by Opco as interest on the Existing Bonds in taxation years ending after the date the Existing Bond Offer Premium payments were made. In each case, the Existing Bond Offer Premium will be determined XXXXXXXXXX, based on prevailing interest rates.

20. Contemporaneously with the Existing Bond Offer described in paragraph 19 above Opco will make a cash tender offer to each Debenture Holder (the “Debenture Offer”) to repay the Debentures. Included in the Debenture Offer will be a premium over the principal amount (the “Debenture Offer Premium”) which will be paid on the early retirement of the Debentures. You have indicated that since the Existing Bonds are not redeemable the Debenture Offer Premium is being offered in order to induce holders to accept Opco's Debenture Offer. The amount of the Debenture Offer Premium to be paid in respect of each of the Debentures relates to, and does not exceed, the value at the time of the payment of the amount that, but for the repayment, would have been paid or payable by Opco as interest on the Debentures in taxation years ending after the date the Debenture Offer Premium payments were made. In each case, the Debenture Offer Premium will be determined XXXXXXXXXX based on prevailing interest rates.

21. The source of funds required by Opco for the Existing Bond Offer, the Existing Bond Offer Premium, the Debenture Offer and the Debenture Offer Premium payments will be the proceeds obtained from the New Bond issue.

22. The Existing Bonds and Debentures that are not repaid by Opco pursuant to the Existing Bond Offer and the Debenture Offer will continue to be outstanding, as Opco does not have the unilateral right to repay them at this time

23. Opco may pay a dividend to holders of its common shares XXXXXXXXXX.

OTHER INFORMATION Opco's address is as follows: XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX Opco's business number is XXXXXXXXXX. Opco is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Tax Centre. PURPOSE OF PROPOSED TRANSACTIONS To permit Opco to repay its indebtedness to Existing Bond holders and Debenture holders who chose to participate in the Existing Bond Offer or the Debenture Offer, as the case may be, and replace it with new lower interest senior debt (the New Bond issue). RULINGS Provided the above descriptions of facts, proposed transactions and purposes of the proposed transactions are accurate and constitute complete disclosure of all the relevant facts and proposed transactions and that the proposed transactions are carried out as set out herein, we confirm the following: A. Provided that the Existing Bond Offer Premium mentioned in paragraph 19 above and the Debenture Offer Premium described in paragraph 20 above (collectively the Premiums) are made to a person or partnership by Opco as a penalty or bonus payable by Opco because of the repayment by Opco of all or part of the principal amount of the debt obligations before their maturity, and to the extent that the payment by Opco of the Premiums 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 Existing Bonds or the Debentures, would have been paid or payable by Opco as interest on the obligations for a taxation year ending after that time, the payment of the Premiums will, for purposes of the Act including subparagraph 212(1)(b)(vii), be subject to the provisions of paragraphs 18(9.1)(e) and (f) of the Act.

B. Provided that Opco was entitled to claim a deduction under subsection 20(1)(c) of the Act in respect of the Existing Bonds and the Debentures, it will be entitled to deduct interest paid or payable in respect of the year (depending on the method regularly followed by the taxpayer in computing the taxpayer's income) on the proportion (the “Premium Proportion”) of the monies received upon the issuance of the New Bonds that :

i) the aggregate of the Existing Bond Premium and the Debenture Premiums

is of ii) the aggregate of the monies received upon the issuance of the New Bonds to the extent that the interest in the XXXXXXXXXX or property substituted therefor is used by Opco in the year for the purpose of gaining or producing income from a business. The above rulings are based on the Act in its present form and do not take into account any proposed amendments thereto. The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued on December 30, 1996 and is binding on Revenue Canada Customs, Excise and Taxation provided that the proposed transactions are completed before XXXXXXXXXX. COMMENTS a) Except as expressly stated herein, nothing in this ruling should be construed as implying that Revenue Canada Customs, Excise and Taxation has accepted, approved or confirmed any income tax implications in connection with the facts or proposed transactions referred to herein.

b) Nothing in this ruling should be construed as implying that Revenue Canada Customs, Excise and Taxation has determined, acknowledged or otherwise concluded that the amendments to the Existing Bond Indenture or the Debenture Indenture will not constitute a disposition for purposes of the Act.

Yours truly,

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