21 September 1983 Income Tax Severed Letter B-4625C

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.

Dear Sir:

Re: Subparagraph 212(1)(b)(vii)
of the Income Tax Act

This is to reply to your letter of July 15, 1983, concerning the above captioned provision.

You describe a situation in which a corporation resident in Canada issues three bonds under a trust deed to a corporation resident in the United States. For the purposes of clause 212(1)(b)( vii)(A) of the Income Tax Act, the bonds comprise a single debt issue of obligations that are identical in respect of all rights attaching thereto, except as regards the principal amount thereof. XXX and provide that not more than 25% of the aggregate principal amount outstanding is payable during the first five years from the date of issue, except in the case of the occurrence of ordinary events of default. Two of the bonds are issued in satisfaction of a pre-existing intercompany debt. withholding tax payable under Part XIII of the Act in connection with the repayment of the pre-existing indebtedness was deducted and remitted in accordance with the provisions of the Act.

Pursuant to a pledge agreement securing payment of all the indebtedness evidenced by the bonds, the shares of the debtor corporation are lodged with a Canadian financial institution as custodian. Except in the case of ordinary events of default under the pledge agreement, which includes any default under the trust deed, the custodian must vote the pledged shares in accordance with the directions of the beneficial owners of such shares. The pledge agreement and bonds are assigned by the creditor corporation to certain U.S. corporate lenders such that the scheduled bond payments will be made directly to the said lenders.

You wish to know whether withholding tax is payable by the U.S. lenders under Part XIII of the Act in connection with the interest paid on the bonds. In particular, you have asked whether, for the purposes of subparagraph 212(1)(b)(vii) of the Act, 1) the bonds issued in satisfaction of the pre-existing intercompany debt evidence a new indebtedness, and 2) whether the U.S. lenders are at arm's length with the debtor corporation.

With respect to 1) above, we note that we do not have copies of the trust deed under which the bonds were issued or of the documents evidencing the pre-existing indebtedness. Accordingly, we are unable firmly to opine as requested. However, we would draw your attention to the comments in paragraph 6 of Interpretation Bulletin IT-361, according to which a new evidence of indebtedness is considered to be issued when an obligation is renegotiated otherwise than as provided for under the terms of the original obligation. In addition, the views expressed in paragraphs 2 and 7 of IT-448 are relevant, inasmuch as, in the Department's opinion, any transaction or event that involves the redemption or cancellation of a security (i.e. the instrument evidencing the pre-existing debt) or that effects a change in repayment schedule or maturity date of a security, generally results in a disposition thereof and in the issuance of a new evidence of indebtedness for the purposes of subparagraph 212(1)(b)(vii) of the Act.

With respect to 2) above, in our opinion, the pledge and assignment of the shares of the debtor corporation would not, while the custodian is required to vote the shares in accordance with the directions of the beneficial owners, in and of itself cause the debtor corporation and the U.S. lenders not to be dealing at arm's length for the purposes of subparagraph 212(1)(b)(vii) of the Act.

We trust that the following comments are of assistance.