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.
Principal Issues: Whether the replacement of a subsidiary's debt o/s at Oct 31, 2006 with new equity issued by the parent (SIFT) is considered growth for the purposes of 122.1(2)?
Position: Yes. The exception stated in Finance's guidelines on the normal growth rules that a SIFT can replace debt outstanding at Oct 31 with new equity and such new equity would not be considered growth does not extend to the replacement of debt of a lower tier entity with new equity of the SIFT.
Reasons: Policy Intent of Normal Growth Guidelines.
XXXXXXXXXX
2009-035159
January 7, 2011
Dear XXXXXXXXXX ,
We are responding to your letter dated December 14, 2009, in which you asked whether the issuance to the public of, trust units from treasury, debentures that are convertible into trust units, or a combination of both trust units and debentures, to repay the debt of the trust's subsidiary corporation would be considered growth for the purposes of determining whether the trust exceeds normal growth. The debt of the subsidiary corporation was outstanding on October 31, 2006 and is guaranteed by the trust. You also stated that the debt financing of the overall organization (trust and subsidiary corporation) has primarily been issued from the subsidiary corporation with a guarantee from the trust.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. While we are unable to comment on the particular situation described in your letter, the following general comments may be of assistance to you.
Our Comments
On October 31, 2006, the federal Minister of Finance, announced the Tax Fairness Plan. The plan included a new distribution tax on certain amounts distributed by a specified investment flow-through (SIFT) trust or SIFT partnership. A SIFT trust and SIFT partnership are defined respectively in subsections 122.1(1) and 197(1) of the Income Tax Act (Act). The new tax applied as of 2007, but was deferred until 2011 for trusts and partnerships that would have been a SIFT on October 31, 2006 had the definition of SIFT trust and SIFT partnership applied to the trust or partnership as of that date. The deferred application of the new tax on existing SIFTs is conditional on the existing SIFT not unduly expanding, that is, not exceeding normal growth. Normal growth is not defined in the Act, but paragraph 122.1(2)(b) of the Act states that normal growth is determined by reference to the normal growth guidelines issued by the Department of Finance on December 15, 2006 (Guidelines).
The third bullet of paragraph 8 of the Guidelines states, "Replacing debt that was outstanding as of October 31, 2006 with new equity, whether through a debenture conversion or otherwise, will not be considered growth for these purposes. New, non-convertible debt can also be issued without affecting the safe harbour; however, the replacement of that new debt with equity will be counted as growth." This exception was intended to only apply where the assets of the SIFT were not increased as a result of the replacement of outstanding debt with new equity. In the scenario that you have provided, it is our opinion it is probable that the trust's assets will increase. Therefore, the trust's issuance to the public of new equity or convertible debentures, to repay the debt of its subsidiary corporation, will be considered growth for the purposes of determining whether the trust exceeds normal growth.
We trust the above answers your questions.
Yours truly,
Roger Filion CA
For Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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