Joint Committee notes that Pangaea is undercutting the ITA’s policy not to impose Part XIII tax on cross-border payments to arm’s-length debenture holders

In a 2020 submission, the Joint Committee expressed concerns that a broad reading of Pangaea could result in the imposition of Part XIII tax on commitment fees, and consent fees and restructuring fees, paid to arm's length non-resident lenders/ debt holders – which would run contrary to the policy choice made to reduce the cost of capital to Canadian businesses by eliminating the withholding tax payable to arm's-length lenders.

After Finance asked for information on the "real world" market implications of Pangaea in the above context, and after canvassing publicly available information on recent transactions in this context, the Joint Committee identified that the majority of such transactions have a risk factor disclosure as to the potential imposition of Canadian withholding tax on such fees.

Furthermore, the boards of directors of such issuers may well be concerned by their potential joint and several liability for unremitted Part XIII taxes of a restructuring issuer in financial difficulty, so that they may insist on withholding. For instance, in the Aleafia Health debt restructuring, there was withholding on the consent fees paid to the non-resident debenture holders.

Neal Armstrong. Summary of Joint Committee, “Impact of Pangaea case,” 10 January 2024 Joint Committee Submission under s. 212(1)(i).