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 various circumstances are acceptable events of default.
Position: Maybe, depends on all relevant facts.
Reasons: It is not possible to provide a definitive answer given the limited information provided in the request.
XXXXXXXXXX 983365
C. Savage
Attention: XXXXXXXXXX
November 10, 1999
Dear Sirs:
Re: Technical Interpretation subparagraph 212(1)(b)(vii) of the Income Tax Act (the Act)
This is in response to your letter of December 22, 1998, requesting our views with respect to the application of subparagraph 212(1)(b)(vii) of the Act in various circumstances considered to be triggering events whereby a corporate borrower resident in Canada is obliged, pursuant to the terms of the obligation, to place the principal amount of the loan on deposit with a third party as cash collateral on the occurrence of the triggering event.
In each of the first three situations, on an involuntary asset sale, the borrower must make deposits to collateral accounts with a third party. In the fourth situation, the borrower must place the full principal amount of the loan into a collateral account with a third party on the occurrence of a triggering event such as a change of control, a ratings decline, or an asset sale (other than an involuntary asset sale). In all situations, the failure to make the deposit constitutes a listed event of default under the loan agreement.
As stated in Income Tax Technical News Issue No. 9, we will continue to accept circumstances such as a change of control, ratings decline, or asset sales as being events of failure or default under a particular loan agreement although they may not be listed defaults under the terms of the agreement. However, we will continue to maintain that in order to be acceptable, the events of failure or default must have commercial reality, must be beyond the control of the lender, and must not be contrived.
We apologize for the delay in responding to your letter.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
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