16 September 1999 External T.I. 9916845 - POST-AMBLE TO 212(1)(B)

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: Does the post-amble to subsection 212(1)(b) of the Act apply to non-cumulative fixed interest payments that are generally payable on a periodic basis, but not payable in respect of periods in which the borrowing company fails to pay a dividend?

Position: It depends upon the particulars of the debt. Generally the post-amble would not apply, unless the facts indicate that the payments are disguised profits.

Reasons: The payments do not appear to have the character of participating debt.

xxxxxxxxxx 991684
R. Maley
Attention: xxxxxxxxxx

September 16, 1999

Dear Sirs:

This is in reply to your letter dated June 15, 1999, in which you requested some guidance on the application of the post-amble to paragraph 212(1)(b) of the Act (“the post-amble") to interest payments that, under the terms of the debt, would be payable at a fixed rate except during any period in which the debtor ceases to pay dividends on its common or preferred shares. In that event, no amount would be payable on the debt.

We are unable to consider proposed transactions involving specific taxpayers in a general letter of opinion. If the situation presented is in contemplation of a proposed transaction, you may request an advance income tax ruling in accordance with the guidelines set out in Information Circular 70-6R3. We can, however, provide you with the following general comments.

The post-amble provides that amounts payable on an obligation, other than a prescribed obligation, are deemed to not be interest for the purposes of subparagraphs (ii) to (vii) and (ix) if they are contingent or dependent on the use of or production from property in Canada, computed by reference to revenue, profit, cash flow, commodity price of any other similar criterion, or by reference to dividends paid or payable to shareholders of any class of shares of the capital stock of the corporation.

It is our view that the post-amble is not directly concerned with the timing of payments provided that the amount payable is not dependent or variable upon one of the criteria specified in the post-amble (e.g., dividends). However, in some cases, a timing contingency may have the effect of causing the amount payable to vary with reference to one of those criteria.

Whether or not the post-amble would apply to deem a payment to not be interest for the purposes of subparagraph (ii) to (vii) and (ix) would depend upon the particulars of the payments in question. It is our opinion that the post-amble generally would not apply in respect of a payment of interest that is non-cumulative, fixed, but subject to non-payment in periods where no dividend is declared, unless the facts of the situation indicate that the payment has the character of disguised profit.

Although the foregoing comments are not binding on the Department, we trust they assist.

Yours truly,

F. Lee Workman
Manager
Financial Institutions
financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch