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.
Dear Sir:
This is in reply to your letter of October 24, 1980 concerning the interpretation of subparagraph 212(1)(b)(vii).
We reviewed the sample "substitute basis" clause included in a typical Euro-dollar loan agreement. The loan agreement proides for a re-negotiation of interest on various dates. The "substitute basis" clause provides that if by reason of changes affecting the London Interbank Market adequate and fair means do not exist for ascertaining the rate of interest on the basis provided for in the agreement or the continuation of the loan as a Euro-dollar loan has been made impractical by occurrence of events which materially and adversely affects the London Interbank Market, then, the lenders will negotiate in good faith with the borrower and provide in writing terms of a substitute basis for the continuation of the loans. If the borrower does not accept, the loan must be repaid.
In our view, this clause does not obligate the borrower to repay the loan as the decision not to accept the "substitute basis" clause in and by itself will not disqualify the obligation from meeting the requirements.
You have also requested our views concerning the conversion of a revolving loan to a term loan. In the circumstances you contemplate, there is only one agreement but it provides for a three year revolving loan period after which the loan would be converted to a 5 year term loan payable in five equal instalments commencing on the anniversary of the term loan. In effect, when the revolving loan period is considered, only 20% (i.e. 1/5) of the loan is paid before the fifth year.
Generally, it is our view that the obligation comes into existence when the funds are advanced. If no more than 20% of the obligation is required to be repaid before 5 years from the advance of the funds, the repayment requirement for 212(1)(b)(vii) exemption would be met. This would remain so even if the borrower voluntarily, during the revolving loan period, repaid portions of the funds advanced. If, however, the borrower secured additional advances during the revolving loan period and those additional amounts were included in the calculated repayment before year five, the requirements of 212(1)(b)(vii) may not be met.
In order to make a determination in a specific case, it would be necessary to examine the complete agreement and review the transaction during the revolving loan period.
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