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.
XXX 7-901652
Background
The taxpayer applied for a ruling in February, 1990 (File No. 3- 3001). The application was withdrawn as time did not permit a complete analysis of the issues involved prior to the closing date of the proposed transactions. It was recommend that the transactions be completed and the matter be addressed to the relevant district office along with a request for a referral back of Rulings if it was still considered necessary to obtain a determination on the withholding issue described below.
Issue
XXX
Analysis
- 1. The rating decline in and of itself would be acceptable event of default. Paragraph 15 of Interpretation Bulletin ??? compliance with credit covenants which enables the lender to accelerate payment. Similarly, principal and penalty payments made by the borrower to restore financial ??? agreed to in the loan agreement will not, in and by themselves, disqualify the interest payments from the exempting provisions of subparagraph 212(1)(b)(vii).
- 2. In question 1 of the 1989 Round Table RCT was asked if a change in control was an acceptable event of default. The question illustrated the point with reference to a leveraged buy out where credit worthiness may be of concern. A change in control need not be leveraged in order to have an effect on credit worthiness. For example, a lower rated corporation could acquire a higher rated corporation. The higher rated corporation may experience a rating decline as a result.
The answer to the Round Table question was an unqualified yes, i.e., if the loan agreement states a change in control is an event of default that would be acceptable for the purposes of clause 212(1)(b)(vii)(C).
- 3. RCT is in the process of publishing an advance income tax ruling that approves of a change in control as an event of default.
Position Taken
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