A loss was realized on a convertible note by converting it otherwise than pursuant to its terms

A ULC, which held non-interest-bearing convertible notes of its wholly-owned LLC subsidiary, was able to realize a loss by converting the notes into "shares" of the LLC otherwise than under the terms of the notes, so that s. 51 did not deny the loss.  This was accomplished by agreeing to convert the notes into a different number of shares than those into which they were convertible under their terms.

Following Byram, the fact that the notes were non-interest-bearing did not cause s. 40(2)(g)(ii) to deny the loss.  (CRA is no longer applying the statement in cancelled IT-239R2 that to get a loss on such a loan, the debtor must be a Canadian subsidiary.)

Finally, CRA referred to a 1989 interpretation for the proposition that s. 51(1) applied "to a conversion made pursuant to the holder's right to convert even if the issuer had the option to repurchase the shares in the meantime" (see, for example, Canexus).

Neal Armstrong.  Summaries of 6 May 2014 Memo 2014-0524651I7 under s. 51(1) and s. 40(2)(g)(ii).