1999 Ruling 9832453 - DISPOSITION OF DEBT: INTEREST DEDUCTIBILITY

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: Disposition of Debt; Deductibility of Interest

Position: Amendments to Trust Indenture did not result in a disposition by the debtholders. Interest on assumed debt deductible pursuant to subparagraph 20(1)(c)(ii)

Reasons: See Issue Sheet

XXXXXXXXXX
XXXXXXXXXX 983245
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in response to your letter of XXXXXXXXXX, as substantially revised by your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer. We acknowledge receipt of your correspondence of XXXXXXXXXX, as well as the information provided to us during our various telephone conversations.

To the best of your knowledge, and that of the taxpayer involved, none of the issues contained herein is:

(i) dealt with in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) subject to a ruling previously issued by the Income Tax Rulings & Interpretations Directorate; or

(v) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has not expired.

In this letter, unless otherwise expressly stated:

(a) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act;

(b) "agreed amount" has the meaning assigned by subsection 85(1);

(c) "Asset Transfer" means the transfer of the Mirror Receivables and the common shares of the Target Subsidiaries to Newco, as described in Paragraph 13;

(d) "BCA" means the XXXXXXXXXX;

(e) "Bco" means XXXXXXXXXX;

(f) "cost amount" has the meaning assigned by subsection 248(1);

(g) "Dco" means XXXXXXXXXX;

(h) XXXXXXXXXX;

(i) XXXXXXXXXX;

(j) "Dco Note" means the promissory note of Dco described in Paragraph 16;

(k) "Debentureholders" means the beneficial owners of the Debentures which evidence the Public Debt, as described in Paragraph 7;

(l) "Debentures" means the Dco debentures issued pursuant to the Trust Indenture, as described in Paragraph 7;

(m) "eligible property" has the meaning assigned by subsection 85(1.1);

(n) "fair market value" means the highest price available in an open and unrestricted market between informed prudent parties acting at arm's length and under no compulsion to act and contracting for a taxable purchase and sale;

(o) "Holdco" means XXXXXXXXXX;

(p) "Mirror Receivables" means the indebtedness of the Target Subsidiaries to Dco described in Paragraph 8;

(q) "Newco A Shares" means the XXXXXXXXXX shares of Newco, as described in Paragraph 12;

(r) "Newco B Shares" means the XXXXXXXXXX shares of Newco, as described in Paragraph 12;

(s) "Newco Note" means the promissory note of Newco described in Paragraph 17;

(t) "paid-up capital" has the meaning assigned by subsection 89(1);

(u) "Proposed Transactions" means the transactions described in Paragraphs 13 to 20;

(v) "public corporation" has the meaning assigned in subsection 89(1);

(w) "Public Debt" means Dco's outstanding indebtedness under the Trust Indenture, as described in Paragraph 7;

(x) "Replacement Trustee" means XXXXXXXXXX;

(y) XXXXXXXXXX;

(z) "series of transactions" includes the transactions or events described in subsection 248(10);

(aa) "stated capital" means stated capital as that expression is used in the BCA;

(bb) "XXXXXXXXXX Supplemental Indenture" means the supplemental indenture described in Paragraph 19;

(cc) "XXXXXXXXXX Supplemental Indenture" means the supplemental indenture described in Paragraph 20;

(dd) "Target Subsidiaries" means the corporations referred to in Paragraph 5(a), the common shares of which will be transferred to Newco as part of the Proposed Transactions;

(ee) "taxable Canadian corporation" has the meaning assigned by subsection 89(1);

(ff) "term preferred share" has the meaning assigned by subsection 248(1);

(gg) "Transferred Assets" means (i) all of the issued and outstanding common shares of the Target Subsidiaries and (ii) the Mirror Receivables;

(hh) "Trust Indenture" means the Dco trust indenture described in Paragraph 7; and

(ii) "Trustee" means XXXXXXXXXX.

Facts

1. XXXXXXXXXX

Dco is a public corporation and a taxable Canadian corporation.

2.

XXXXXXXXXX

3.

XXXXXXXXXX

4.

XXXXXXXXXX

5.

XXXXXXXXXX

6.

XXXXXXXXXX

7. Dco is party to a Trust Indenture dated as of XXXXXXXXXX with XXXXXXXXXX, as trustee, as supplemented and amended by XXXXXXXXXX. Dco has currently outstanding under the Trust Indenture indebtedness of approximately $XXXXXXXXXX (the "Public Debt"), which debt is evidenced by debentures issued pursuant to the Trust Indenture. The Public Debt is held by the investing public ("Debentureholders") and has not been issued to non-resident holders for the purposes of allowing such holders to access the withholding tax exemption under subparagraph 212(1)(b)(vii). Certain issues of Public Debt were made at fixed interest rates in excess of currently prevailing interest rates. Accordingly, the aggregate fair market value of the Public Debt exceeds its aggregate principal amount.

8. Dco has used substantially all of the proceeds of the Public Debt to make interest-bearing loans (the "Mirror Receivables") to the Target Subsidiaries on substantially the same repayment terms as the corresponding Public Debt. The Mirror Receivables bear interest at a rate equal to the interest rate on the corresponding Public Debt.

9. Dco wishes to transfer the Mirror Receivables and the common shares of the Target Subsidiaries to a wholly-owned subsidiary of Dco. Under the Trust Indenture, such a transfer will be permitted only if the requirements of XXXXXXXXXX of the Trust Indenture are satisfied. XXXXXXXXXX of the Trust Indenture provides as follows:

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX

Article XXXXXXXXXX of the Trust Indenture was included in the Trust Indenture when the Trust Indenture was entered into in XXXXXXXXXX and has not been subsequently amended.

10. The Trust Indenture specifically provides that the Trust Indenture and the Debentures are to be construed in accordance with the laws of the Province of XXXXXXXXXX and shall be treated in all respects as XXXXXXXXXX contracts.

11.

XXXXXXXXXX

12. Newco will be incorporated under the BCA. Newco will be a taxable Canadian corporation. Newco will have two classes of common shares: XXXXXXXXXX shares (the "Newco A Shares") and XXXXXXXXXX shares (the "Newco B Shares").

XXXXXXXXXX

Dco will subscribe for one Newco B Share for nominal consideration, which will be the only share of Newco issued and outstanding at the commencement of the Proposed Transactions.

Proposed Transactions

Following the receipt of the rulings requested herein and the necessary regulatory, shareholder and creditor approvals, the following transactions will be undertaken:

13. Dco will transfer the Mirror Receivables and the common shares of the Target Subsidiaries to Newco. In consideration, Newco will:

(a) issue a specified number of Newco A Shares and Newco B Shares to Dco; and

(b) assume such portion of Dco's liability in respect of the Public Debt (but excluding any amount in respect of interest accrued on the Public Debt prior to the effective time of the transfer) as will have a fair market value equal to the aggregate cost amount to Dco of the Transferred Assets immediately before the Asset Transfer.

Dco estimates that the aggregate cost amount of the Transferred Assets immediately before the transfers described in this paragraph will equal or exceed the fair market value of the Public Debt.

14. The agreement between Dco and Newco governing the Asset Transfer will also require Newco to execute such documents as are necessary under Article XXXXXXXXXX of the Trust Indenture in connection with the Asset Transfer.

15. Dco and Newco will jointly elect pursuant to subsection 85(1), in prescribed form and within the time determined under subsection 85(6), with respect to the transfer of each particular property included in the Transferred Assets which is an eligible property. The agreed amount for the purposes of such election in respect of a particular property included in the Transferred Assets will not exceed the fair market value of the property and will not be less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) or (ii). For the purposes of such election, the entire amount of the non-share consideration referred to in Paragraph 13(b) above, will be allocated amongst the assets comprising the Transferred Assets in such manner that the portion of such non-share consideration allocated to a particular asset will not exceed the cost amount to Dco of such asset immediately before the Asset Transfer. The aggregate stated capital of the Newco A Shares and Newco B Shares issued as a consequence of the Asset Transfer will be set at an amount not in excess of the paid-up capital of such shares as determined under subsection 85(2.1).

16. If the fair market value of the Public Debt exceeds the aggregate of the cost amount of the Mirror Receivables and the common shares of the Target Subsidiaries, Newco will assume the remaining portion, if any, of the Public Debt (but excluding any amount in respect of interest accrued on the Public Debt prior to the effective time of such debt assumption) in consideration for the issuance by Dco to Newco of a demand promissory note (the "Dco Note") having a principal amount equal to the fair market value of such portion of the Public Debt, with interest payable only from the date of demand for payment by the holder to the date of payment at a rate equal to the average monthly prime rate of a Canadian chartered bank.

17. Newco will declare dividends on the Newco A Shares and Newco B Shares in an aggregate amount equal to the principal amount of the Dco Note. Such dividends will be paid by way of the issuance by Newco to Dco of a demand promissory note (the "Newco Note") having a principal amount equal to the aggregate amount of such dividends, with interest payable only from the date of demand for payment by the holder to the date of payment at a rate equal to the average monthly prime rate of a Canadian chartered bank.

18. The obligations of Newco and Dco to each other under the Newco Note and the Dco Note, respectively, will be set off against each other as payment in full of such notes and the notes will be cancelled.

19. Pursuant to Article XXXXXXXXXX of the Trust Indenture, Dco, Newco, the Trustee and the Replacement Trustee will enter into a supplemental indenture (the "XXXXXXXXXX Supplemental Indenture") to evidence the assumption by Newco of the obligations referred to in section XXXXXXXXXX of the Trust Indenture. The XXXXXXXXXX Supplemental Indenture will also provide for the addition of the Replacement Trustee as trustee in substitution for the Trustee. The Debentureholders will not be involved in the negotiation of the terms of the XXXXXXXXXX Supplemental Indenture and formal approval of the XXXXXXXXXX Supplemental Indenture by the Debentureholders is not required and will not be obtained. The XXXXXXXXXX Supplemental Indenture will not release Dco as an obligor in respect of the Public Debt and, immediately following the coming into effect of the XXXXXXXXXX Supplemental Indenture, the Debentureholders will have identical rights against each of Dco and Newco in respect of the Public Debt.

20. The provisions of the Trust Indenture will be amended by a further supplemental indenture (the "XXXXXXXXXX Supplemental Indenture") entered into by Dco, Newco and the Replacement Trustee. The principal amendments to be made by the XXXXXXXXXX Supplemental Indenture will consist of the following:

XXXXXXXXXX

The amendment of the Trust Indenture by way of the XXXXXXXXXX Supplemental Indenture will be made pursuant to specific provisions of the Trust Indenture, which allow the Debentureholders by way of an extraordinary (XXXXXXXXXX%) resolution to assent to any modification of, change in, addition to or omission from the provisions of the Trust Indenture which are agreed to by Dco and Newco. The provisions of the XXXXXXXXXX Supplemental Indenture will have been approved by an extraordinary resolution of the Debentureholders at a meeting of the Debentureholders held prior to the commencement of the Proposed Transactions.

Additional Information

21. The Newco A and Newco B Shares are not, and will not, as a result of the Proposed Transactions, be term preferred shares.

22. There are not, and will not be at any time prior to the completion of the Proposed Transactions, any agreements or undertakings which constitute or include a "guarantee agreement," within the meaning of subsection 112(2.2), with respect to the Newco A Shares or the Newco B Shares.

23 Dco has not, and will not, enter into a "dividend rental arrangement", as defined in subsection 248(1), in respect of the Newco A Shares or Newco B Shares in respect of which any dividends described in Paragraph 17 may be declared.

24. None of the Newco A Shares or Newco B Shares to be issued as described herein will be issued or acquired as a part of a series of transactions of the type described in subsection 112(2.5).

25. Newco will not be a corporation described in any of paragraphs (a) to (f) of the definition of "financial intermediary corporation" in subsection 191(1).

26. Under the law governing the Public Debt there will not be, as a result of the Proposed Transactions,

(a) a novation in respect of any portion of the Public Debt;

(b) a substitution of all or any portion of the Public Debt by a new debt; or

(c) a discharge, rescission or extinguishment of all or any portion of the Public Debt.

27. The Proposed Transactions will not result in the recognition of an outlay or expense to Dco or the inclusion of an amount in the income to Newco under generally accepted accounting principles or well-accepted business principles.

28. The aggregate fair market value of the Transferred Assets will exceed the fair market of the Public Debt at the time the Proposed Transactions are implemented.

Purpose of the Proposed Transactions

29.

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Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as set forth below.

A. The Proposed Transactions will not, in and of themselves, result in the disposition by the Debentureholders of all or any portion of the Public Debt and, for greater certainty, will not result in any income, gain or loss, for the purposes of the Act, to the Debentureholders.

B. Provided that Newco continues to use the Transferred Assets acquired on the Asset Transfer, as described in Paragraph 13 above, for the purpose of gaining or producing income (other than income which is exempt from taxation) and provided that Newco has a legal obligation to pay interest in respect of the liabilities assumed by Newco as described in Paragraphs 13 and 16 above, any such interest paid in the year or payable in respect of the year (depending on the method regularly followed by Newco in computing its income for the purposes of the Act) by Newco in respect of such liabilities (other than liabilities in respect of which Dco was not entitled to deduct interest under paragraph 20(1)(c)), not in excess of a reasonable amount, will be deductible in computing the income of Newco under paragraph 20(1)(c).

C. Provided that the requisite election is made and filed within the time permitted by the Act with respect to the transfer of the Transferred Assets to Newco, as described in Paragraph 13, and provided that the fair market value of each of the Transferred Assets exceeds its cost amount, the provisions of subsection 85(1) will apply to the transfer of each of the Transferred Assets which is an eligible property with the result that the agreed amount in respect of each such property will be deemed to be the proceeds of disposition thereof to Dco and the cost to Newco of such property.

D. The assumption of the Public Debt by Newco on the basis described in the Proposed Transactions will not result in any income, gain or loss, for the purposes of the Act, to Newco and will not result in any amount being deductible by Dco.

E. The full amount of each of the dividends referred to in Paragraph 17:

(a) will be a taxable dividend that will, by virtue of subparagraph 82(1)(a)(ii) and paragraph 12(1)(j), be included in computing the income of Dco for the year in which it is received;

(b) will, by virtue of subsection 112(1), be deductible in computing the income of Dco in the year in which it is received and, for greater certainty, such deduction will not be prohibited by any of subsections 112(2.1), (2.2), (2.3) and (2.4); and

(c) will not be subject to tax under Part VI.1 or Part IV.1.

F. Subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine the tax consequences described herein.

The above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted into law, could affect the rulings provided herein.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada Customs, Excise and Taxation provided that the proposed transactions are completed by XXXXXXXXXX.

Caveat

Nothing in this ruling should be construed as implying that Revenue Canada, Customs, Excise and Taxation has reviewed or is making a determination or ruling in respect of:

(a) the fair market value or the adjusted cost base of any particular asset or the paid-up capital of any shares referred to in this advance ruling;

(b) the law governing the Public Debt, specifically whether the Proposed Transactions result in the extinguishment or discharge of the Public Debt and its substitution by a new obligation under such law; or

(c) any tax consequences relating to the facts and Proposed Transactions described herein other than those specifically described in the rulings given above

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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