22 September 1999 Ruling 9903613 - EXCESS CASH FLOW

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: excess cash flow

Position: general comment

Reasons:

XXXXXXXXXX 							990361
B. Kerr
Attention: XXXXXXXXXX 

September 22, 1999

Dear Sirs:

Re: Excess Cash Flow - File 961508

This is in response to your letter of February 10, 1999 wherein you requested our confirmation on the meaning of the term "excess cash flow" as used in an advance income tax ruling we issued to your firm. You have indicated that the Consolidated statement of changes in financial position reflects the company's cash position not its cash flow.

Our Comments

As stated in paragraph 24 of Interpretation Bulletin IT-527, the purpose of an excess cash flow provision is to provide additional assurance that refinancing using distress preferred shares is a consequence of financial difficulty rather than for some other purpose such as expanding a business, and that the proceeds of the issue are utilized in the business carried on in Canada.

The excess cash flow provision in a ruling represents a comitment by the issuer to use cash flow in excess of operating requirements to redeem or retire the distress preferred shares. Excess cash flow is essentially the total of the cash flows, as determined in accordance with generally accepted accounting principles, of each corporation in the group, subject to certain limitations in regard to capital expenditures. These limitations are intended to:

(a) deny payments to shareholders, other than the holders of the distress preferred shares, whether by way of dividend or repayment of shareholder loans; and

(b) restrict expenditures to those necessary to carry on the existing business as opposed to expanding the business.

Page 1540.10 of the CICA Handbook (page 263 - Accounting Recommendations - June 1998), provides the following definitions:

"Cash" comprises cash on hand and demand deposits.

"Cash equivalents" are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

"Cash flows" are inflows and outflows of cash and cash equivalents.

Since you have not provided us with a definition of "cash position" we are unable to confirm how you would reconcile that figure in order to come up with the applicable cash flows in your particular situation. We suggest restating your figures to reflect cash flows as provided for above and adjust them accordingly as outlined in Appendix I of IT-527 and the respective paragraph of the ruling.

We trust that these comments will be of assistance.

Yours truly,

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