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:
Enquiry seeking confirmation on the application of the exception in clause 212(1)(b)(vii)(E) to a factual situation where the note holders have a contractual obligation to purchase shares (that are prescribed securities within the meaning of Regulation 6802) (the “Shares”) of the debtor within 5 years from the date of issue of the Notes and the purchase price for the Shares could be satisfied by delivering to the issuer Notes having an equivalent principal amount
Position TAKEN:
The option granted the note holders to satisfy the purchase price of the Shares by redeeming the Notes would taint the exemption and interest on the obligation would be subject to withholding tax.
Reasons FOR POSITION TAKEN:
Reading of the broad wording in the legislation (i.e. “... may not under any circumstances...”) and consistent with previous positions taken (August 25, 1995 - file # 5-951733, August 20, 1991 memo - file # 912180; July 1991 memo - file # 910431).
XXXXXXXXXX 5-980846
P. Diguer
Attention:XXXXXXXXXX
May 12, 1998
Dear Sir/Madam
Re: Subparagraph 212(1)(b)(vii) of the Income Tax Act (Canada)
This is in reply to your letter dated April 2, 1998 in which you requested confirmation on the application of clause 212(1)(b)(vii)(E) of the Income Tax Act (Canada) (the “Act”) to a specific situation described in your letter.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R3 dated December 30, 1996. This Directorate also provides technical interpretations of the various provisions of the of the Act but we do not provide tax planning advice.
The facts outlined in your letter appear to relate to actual proposed transactions involving particular taxpayers and therefore a binding determination from the Department regarding the applicability or the inapplicability of any provision of the Act can only be obtained by way of an advance income tax ruling request following the procedures outlined in IC-70-6R3. Nevertheless, we offer the following general comments in connection with your request which we hope is of assistance to you.
Although we have not previously considered a situation where debt holders have a contractual obligation to purchase shares (that are prescribed securities within the meaning of Regulation 6802) of the debtor within 5 years from the date of issue of the debt and the purchase price for the shares could be satisfied by surrendering to the issuer debt having an equivalent principal amount, it appears to us that the debt holder’s rights under the terms of the debt could not be said to be a right to convert or exchange the obligation for a prescribed security but rather is a right to use the obligation to pay for a mandatory purchase. We do not think that the fact that the mandatory purchase is of prescribed securities is sufficient to meet the requirements of clause 212(1)(b)(vii)(E) of the Act and therefore it is our view that the debtor may at some time become obliged to pay more than 25% of the principal amount of the obligation within 5 years from the date of issue. Accordingly, it is our view that withholding tax would be exigible in respect of interest payments made to the non-resident holder.
The foregoing represents our general views with respect to the subject matter of your letter. The foregoing opinions are not rulings and in accordance with the guidelines set out in IC 70-6R3 they are not binding on Revenue Canada, Customs, Excise and Taxation.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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