(a)-(c)

Note terms

In order to obtain “undated” capital that will be used by it inter alia to make distributions to its shareholders, Aco, a resident corporation, will issue Fixed Rate Resetting Perpetual Non-Cumulative Subordinated Notes (the “Notes”) in one or more private placements. They will:

• be issued at no discount or only a shallow discount;
• rank subordinate to all of ACo’s other indebtedness, except indebtedness which by its terms ranks equally or subordinate to the Notes;
• accrue interest initially at the prevailing interest rate at their time of issuance and be payable in arrears on the “Interest Payment Dates,” with the interest rate thereafter being periodically reset on the “Interest Reset Dates;”
• be subject to ACo’s right in its discretion, with prior notice to the holders, to cancel any interest that would otherwise be payable on any Interest Payment Date; however, in such event, Aco will be precluded from declaring dividends or repurchasing shares until interest payments are resumed.
• be redeemable by Aco for their principal plus any accrued and unpaid (and uncancelled) interest
• not trigger an Event of Default under the Notes if there is a failure to make a payment on the Notes when due (including any interest, whether as a result of cancellation or otherwise);
• have no scheduled maturity or redemption date, so that ACo is not required to make any repayment of the principal except upon an Event of Default (principally, bankruptcy or insolvency).

Additional information

The Interest paid or payable by ACo on the Notes will not be deductible under paragraph 20(1)(c) or any other provision of the Act in computing the income of ACo for any taxation year.

Ruling

Interest paid by Aco on the Notes to a recipient (beneficially owning the Notes) dealing at arm’s length with Aco will not be subject to Part XIII tax.

ACo will enter into “reverse repo” transactions with BCo (a sister corporation) under which: at the outset, ACo will pay an amount equalling the Bonds’ then fair market value for their purchase; BCo will agree to repurchase the Bonds from ACo approximately three months later for a repurchase price equaling the original purchase price minus a negative spread of X basis points applied to the purchase price (the “negative repo spread”); and ACo will be obligated to pay an amount equal to and as compensation for coupons, if any, paid on the Bonds (e.g., coupon payments) during the term of the arrangement.

The negative repo spread reflects the negative interest rate that would be paid on short-term deposits at the time of the transaction consistently with arm’s length commercial practice. ACo enters into these transactions because it expects to earn a positive spread by entering into related transactions in which it sells or is short bonds.

Ruling:

The negative repo spread … will not be considered to be interest or an amount paid or credited as, on account or in lieu of, or in satisfaction of interest for the purposes of paragraph 212(1)(b) … .

In its summary, CRA stated its Reasons that:

The agreements are purchase and sale agreements to which subsection 260(2) does not apply.

A Canadian resident taxpayer (Canco) enters into a swap agreement with a non-arm’s length non-resident company (NRco). Payments under the swap agreement are made by Canco to NRco annually, whereas NRco makes its payments to Canco quarterly.

Q.60 at the 1984 CTF Roundtable suggests that where, as here, swap payments are not made contemporaneously, withholding tax may apply to a portion of the outbound payments that represents an interest element. Is this still CRA’s position?

CRA responded that in order for withholding tax to apply to the interest component of a swap payment, the legal character of the amount made by Canco to NRco must be recharacterized as interest for tax purposes. In light of the principle in Shell Canada (that absent a specific provision to the contrary or sham, the taxpayer’s legal relationships must be respected), generally, withholding tax would not apply in this situation absent a finding of sham or the application of specific provision such as s. 245 or 247.

Proposed transactions

ACo will issue unsecured subordinated Notes in one or more public offerings for an amount equalling or approximating their principal amount. The interest thereon (the “Interest”) initially will be at a fixed interest rate that will be reset on each “Interest Reset Date” to a fixed annual rate for the applicable Interest Period plus a spread.

ACo may, in its sole discretion, with prior notice to the Noteholders, cancel any Interest that would otherwise be payable on any Interest Payment Date. However, ACo will agree that, if on any Interest Payment Date, it does not pay in full the Interest then due, ACo will not declare any dividends, or redeem or repurchase any of its shares (except pursuant to any retraction privilege or mandatory redemption provisions attaching to its preferred shares) until the month commencing immediately after ACo resumes Interest payments on the Notes.

The Notes have no scheduled maturity or redemption date. ACo is not required to make any repayment of the Principal Amount except in the event of an event of default.

On the occurrence of a specified event, the Notes will be converted into a number of common shares based on a formula-determined conversion ratio. There is no assurance that the conversion formula would result in the issuance of common shares having a fair market value at least equalling the principal amount of the Notes.

Additional information

The Interest paid or payable by ACo on the Notes will not be deductible under paragraph 20(1)(c) or any other provision of the Act in computing the income of ACo for any taxation year.

Ruling

The Interest amounts will not be subject to Part XIII tax under s. 212(1)(b), provided that i) the recipient of such amounts deals at arm’s length with ACo at the time of the payments, and ii) such Notes are beneficially owned by a person that deals at arm's length with ACo.

Proposed transactions

ACo will issue unsecured subordinated Notes in one or more public offerings at no more than a shallow discount. The interest thereon (the “Interest”) initially will be at a fixed interest rate that will be reset on each “Interest Reset Date” to a fixed annual rate for the applicable Interest Period (equal to LIBOR plus a spread).

ACo may redeem the Notes on the Interest Reset Date or any Interest payment date thereafter or on the occurrence of a specified event (presumably, the event of the Notes becoming subject to Pt. XIII tax). However:

The Notes have no scheduled maturity or redemption date. ACo is not required to make any repayment of the Principal Amount except in the event of an event of default.

ACo may, in its sole discretion, with prior notice to the Noteholders, cancel any Interest that would otherwise be payable on any Interest Payment Date. However, ACo will agree that, if on any Interest Payment Date, it does not pay in full the Interest then due, ACo will not declare any dividends, or redeem or repurchase any of its shares (except pursuant to any retraction privilege or mandatory redemption provisions attaching to its preferred shares) until the month commencing immediately after ACo resumes Interest payments on the Notes.

On the occurrence of a specified event, the Notes will be converted into a number of common shares based on a formula-determined conversion ratio. There is no assurance that the conversion formula would result in the issuance of common shares having a fair market value at least equalling the principal amount of the Notes.

Additional information

The Interest paid or payable by ACo on the Notes will not be deductible under paragraph 20(1)(c) or any other provision of the Act in computing the income of ACo for any taxation year.

Ruling

The Interest amounts will not be subject to Part XIII tax under s. 212(1)(b), provided that i) the recipient of such amounts deals at arm’s length with ACo at the time of the payments, and ii) such Notes are beneficially owned by a person that deals at arm's length with ACo.

The Partnership, a general partnership governed by the laws of a U.S. state that was a Canadian partnership under s. 102 as its partners were Canco and a wholly-owned Canadian sub of Canco, held all the shares of a U.S. LLC (the “Creditor Affiliate”), which had made an interest bearing loan to the Partnership (the “Loan”). The Loan was not recognized for U.S. tax purposes because Creditor Affiliate was a disregarded entity.

The Partnership subsequently transferred all of its assets, including the shares of the Creditor Affiliate, to a newly formed wholly-owned U.S. subsidiary of Partnership (the “Debtor Affiliate”), the consideration for which included the Debtor Affiliate assuming the Partnership’s liability to repay the Loan and to pay the accrued but unpaid interest thereon (the “Accrued Interest”) to the Creditor Affiliate. The Partnership was thereupon released of its obligations to the Creditor Affiliate by the Creditor Affiliate.

In response to a query as to whether Part XIII withholding tax applies to the Accrued Interest pursuant to paragraph 212(1)(b), the Directorate indicated its “preliminary conclusion” that there was a novation of the Partnership’s Loan obligation and then stated:

[A]t the time of this novation, the Partnership would be considered to have made a payment or credit in kind of the Accrued Interest to the Creditor Affiliate by delivering the Debtor Affiliate’s covenant to make the payments under the Loan agreement to the Creditor Affiliate.

After noting that s. 212(13.1)(a) deemed the Partnership to be a person resident in Canada respecting then kind payment of the Accrued Interest, it concluded:

[P]ursuant to paragraph 212(1)(b), the Creditor Affiliate would have an obligation to pay a tax of 25% on the amount of the Accrued Interest that was paid or credited to it in kind by the Partnership at the time the obligation to pay the Accrued Interest was assumed by the Debtor Affiliate as a result of the novation.

underline;">: Background. The (Canadian-resident) Trust was formed to provide credit protection to the (non-resident unrelated) Bank by entering into credit-default swaps ("CDS") with the Bank, secured by pledges of collateral. The acquisition by the Trust of the collateral was funded by issuing (apparently unsecured) short-term interest-bearing Notes, and were being regularly rolled over. In XX (presumably, 2008), the Trust ceased to be able to roll over the Notes.

Settlement

After protracted litigation between the Trust and the Bank and "arm's length negotiations," they reached a Settlement Agreement, which resulted in the Noteholders (which now included the "Non-Resident Holders," comprising the Bank and certain of its subsidiaries, and the resident Fund) receiving repayment in full of the principal owing. This repayment followed on the Bank making specified payments to the Trust under the CDS. The implementation of the settlement occurred pursuant to a CCAA plan of compromise and arrangement, which was voted on by the Noteholders. The Plan provided that the Notes would bear interest at BA-based rates and that "the recourse of the Noteholders to receive the Interest is limited to the assets of the Trust that remain after the repayment of the principal amount owing on the Notes [and certain costs].".

Proposed transaction

Each Noteholder will receive a pro rata partial repayment of the interest amount owing to it. The Trust assets available are insufficient to repay such interest in full.

Rulings

. A. The payments of interest by the Trust to the Non-Resident Holders will not be "participating debt interest." Reasons (per summary):

The fact that interest would be paid by the Trust based on the available cash in the Trust…(i.e., the fact that the Trust will not be able to pay all the interest it owes…) does not impact the conclusion that the interest on the Notes is not being computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion.

"B. The entering by the Non-Resident Holders into the Settlement Agreement and their voting in favour of the Plan, in and of themselves, will not result in any of the Non-Resident Holders being considered to not deal at arm's length…with either the Trust or the Trustee."

Given that a nephew and his uncles were not related, interest on a notes issued by the nephew's corporation to acquire another corporation from his uncles would not be subject to Part XIII tax provided that it dealt at arm's length with them as a factual matter.

The taxpayer purchased assets from the vendor (apparently, a non-resident) in consideration for shares of the taxpayer and interest-bearing debt, that was evidenced by a note providing that unpaid interest could be added to the principal of the note. This was done, and a new note subsequently was issued for the amount of the original indebtedness plus the capitalized interest. After finding that the issuance of the second note did not constitute a payment by novation, CRA went on to find that there also was not resulting payment or crediting of the interest. In this regard, it quoted from the Québec Cartier decision, and stated:

[T]he Taxpayer did not pay the increased and annually capitalized interest and did not credit the Vendor with such interest when the note payable on XXXXXXXXXX was issued on XXXXXXXXXX.

Would "Part XIII withholding tax… apply to amounts of interest and/or principal payments made by a Canadian resident corporate guarantor to a non-resident lender where the original corporate borrower was a non-resident?" CRA responded:

Part XIII withholding tax would apply to the interest portion of the payment by the resident guarantor if the provisions of paragraph 212(1)(b) are met, i.e., if the interest is not fully exempt interest, and is paid or payable to a person with whom the payer is not dealing at arm's length, or is participating debt interest. Furthermore…where interest on the original indebtedness would have met the provisions of paragraph 212(1)(b), the portion of the payment by a resident corporate guarantor retaining the character of interest would meet the provisions of paragraph 212(1)(b) as well.

The corollary is that where interest on the original indebtedness would not have met the provisions of paragraph 212(1)(b), such as if the interest was fully exempt interest, or was not fully exempt interest but was paid to an arm's length recipient.. the portion of the payment by a resident corporate guarantor retaining the character of interest would not meet the provisions of paragraph 212(1)(b) either and therefore Part XIII would not apply.

"Where a loan agreement provides for a gross-up of the interest payments, our position is that paragraph 18(1)(t) of the Act does not apply to the gross-up amount and that the gross-up amount may be considered as additional interest for the purposes of paragraph 212(1)(b) ... ."

Where holders of notes receive at maturity a return linked to the performance of three mutual funds, the post-amble under s. 212(1)(b) will not apply so as to deny the availability of exemption in s. 212(1)(b)(vii). The issuer was not related to the mutual funds nor were the profits of the mutual funds linked to the issuer.

An interest rate under a term facility intended to qualify for the exemption under s. 212(1)(b)(vii) was equal to LIBOR plus a spread which decreased as the leverage (measured by the ratio of funded debt of the borrowers to EBITDA) decreased. CRA ruled this arrangement did not cause the post-amble to s. 212(1)(b) to apply. Although the interest payable varied as a result of changes in EBITDA, the extra amounts payable simply used EBITDA as a tool to assess creditworthiness and, as the borrower became more profitable, payments decreased, which was the opposite of participating debt.

In the context of a "tower" structure, a partnership of which two taxable Canadian corporations are the partners borrows money from a U.S. financial institution in order to acquire an interest in a U.S. limited liability company. The Directorate indicated that in a recent tax ruling request, the CRA had concluded in light of the foreign law applicable to such a partnership, the provisions of the partnership agreement and the terms and conditions of the loan agreement between the partnership and the U.S. lender that the partners of the partnership were considered to be the payers of the interest on the loan, with the result that such interest was not exempt from withholding tax as the loan did not qualify under s. 212(1)(b)(vii).

Periodic swap payments made under a "plain vanilla swap" were not subject to Part XIII tax.

"A loan agreement that contains a provision for increased payments to the lender that are based on the ratio of certain debt to EBITDA ... of the borrower may fall within the ambit of the broad wording in the postamble ... ."

CCRA "would not generally consider interest that is computed by reference to a stock index as satisfying the exception conditions described in the postamble to paragraph 212(1)(b) ... as long as the Agency is satisfied that the particular index chosen is not influenced by the inclusion in that index of the shares of the issuing corporation, corporations related to the issuing corporation or a corporation or corporations whose primary business is substantially similar to that of the issuing corporation ... [O]ur response is predicated on the understanding that the return on the obligation does, in fact, represent 'interest' on the obligation."

Recharacterizing periodic swap payments as interest could not be supported given that the relationship between the parties was not that of lender-borrower.

A payment made pursuant to "the risk mitigation provision" in a swap agreement would not be considered to be on account, in lieu of payment of, or in satisfaction of interest.

Before concluding that it generally would be acceptable for the interest rate on a debt instrument to vary in accordance with the value of a foreign currency, the Directorate stated "although foreign currency can be bought and sold and as such could be considered a commodity, it is our position that in the context of the paragraph 212(1)(b) postamble, 'commodity price' should not be considered to include foreign currency fluctuations, but rather in general is to be limited to, for example, prices for tangible commodities ...&nbsp."

To date the Directorate has not adopted a position that would extend the position in ITT in No. 11 to debt linked to a stock index such as the Dow Jones Industrial Average.

Deemed interest on prescribed debt obligations is subject to withholding tax under s. 212(1)(b).

Canadian dividend or interest income paid to a pooled common trust fund in the U.S. will be treated for Part XIII purposes as being paid to a trust resident in the U.S.

The Financial Industries Division has recommended that the assessing policy in IT-233R be applied for all purposes of the Act including Part XIII.

Liability for withholding under s. 212(1)(b) is determined from the perspective of the non-resident payee and not from that of the resident payor. Where a Canadian corporation makes payment by virtue of its guarantee of the debt of its non-resident parent, then where the debt has not been renegotiated and rescheduled the portion of the indemnity payment which is in respect of accrued interest that is due will be subject to Part XIII tax as the non-resident payee receives those payments of interest. Where the loans are renegotiated and rescheduled and the Canadian subsidiary provides advances to the borrower which must be used to extinguish the outstanding accrued interest, the advance will not result in the actual payment by the borrower [sic] in satisfaction of interest, but nonetheless will be subject to Part XIII tax on the basis of the "in lieu of or in satisfaction of" wording.

Where payments made by a provincial government pursuant to a swap agreement were found to contain an element of interest, the Agency would generally consider the obligation to make the payment as similar to a bond, debenture, note or mortgage of a government of the province.

A foreign-denominated index-linked note issued by a Canadian bank which did not provide for the return of the principal amount or any interest or other amount on the note prior to the maturity date, and with the return on the note being deducted by the bank for financial statement and tax purposes on the maturity date, would be exempt from withholding tax by virtue of s. 212(1)(b)(iii)(D).

Favourable ruling with respect to a material adverse change clause whose wording was redacted.

Non-resident term lenders make a loan to a wholly-owned subsidiary ("Finco") of the general partner of a Canadian limited partnership that is a subsidiary partnership (through an intermediate unit trust) of an income fund. Finco on-lends on similar terms to the limited partnership. Events of default include a delisting of units of the income fund, and the partnership ceasing to be a direct or indirect subsidiary of the income fund. Ruling that interest paid on the loan to Finco by arm's length lenders is exempt from withholding.

A wholly-owned taxable Canadian subsidiary ("Finco") of another taxable Canadian corporation ("ACo") on-lends money borrowed from a non-resident of Canada to a second-tier wholly owned partnership of ACo ("LP #2") with the loan to Finco being secured by a mortgage granted by LP #2, a limited guarantee from ACo and a pledge by ACo of its units in a holding partnership for LP #1. Events of default under the loan to Finco include the cancellation of an operating licence for the business of LP #2, and specified changes in the direct or indirect ownership of Finco.

Ruling that the exemption is available.

Favourable ruling with respect to a cross-border term loan made to an indirect subsidiary ("Finco") of an income fund, with the proceeds on-lent to an indirect general partnership subsidiary of the income fund where a "change of control" (giving a rise to an event of default) is defined to mean any event which results in equity interests representing more than 50% of the voting or economic interest in the Fund being held, directly or indirectly, by any person or associated group of persons; proceeds of asset sales in excess of specified annual limits are required to be utilized to make offers to repay the term loan; and excess cash flow generated in amounts that otherwise would exceed the 25% limit are required to be put into an account with a U.S. agent of the term lenders in the Finco name.

In indicating that where a non-resident payer is a partnership (made up of corporations) and is deemed to be a resident of Canada, the exemption in s. 212(1)(b)(vii) is available, CRA stated:

"Where the provisions of paragraph 212(13)(f) of the Act or subsection 212(13.2) of the Act are applicable in respect of a particular payment such that a non-resident payer of interest is deemed to be a resident of Canada and the payer is a corporation or a partnership, where all of its members are non-resident corporations or another partnership where all of its members are non-resident corporations to which 212(13)(f) of the Act would apply, interest payable in these circumstances will represent 'interest payable by a corporation resident in Canada' for the purposes of subparagraph 212(1)(b)(vii) ... ."

An interest rate under a term facility intended to qualify for the exemption under s. 212(1)(b)(vii) was equal to LIBOR plus a spread which decreased as the leverage (measured by the ratio of funded debt of the borrowers to EBITDA) decreased. CRA ruled this arrangement did not cause the post-amble to s. 212(1)(b) to apply. Although the interest payable varied as a result of changes in EBITDA, the extra amounts payable simply used EBITDA as a tool to assess creditworthiness and, as the borrower became more profitable, payments decreased, which was the opposite of participating debt.

Permissible events of default in a project financing included events that involved parties not subject to the loan agreement, e.g., parent entities merging or consolidating without lender approval, direct or indirect interests in the Borrower being sold to certain restricted persons without prior consent and various defaults by project contractors or material adverse events in respect of them. Also, an expansive illegality clause permitted; and Borrower is required to offer to repay the loan on various specified events including on receipt of insurance or expropriation proceeds or upon receiving a notice of illegality from the lenders' agent.

A Canadian subsidiary ("Finco") of the general partner of a Canadian limited partnership issues U.S. dollar secured notes in the U.S. market and on-lends the funds to the partnership. Ruling that the interest on the loans is exempt.

Favourable ruling with respect to a subsidiary trust of an income fund transferring a business division to a partnership, which borrowed from a newly-incorporated subsidiary of the trust the proceeds of a loan intended to qualify under s. 212(1)(b)(vii).

A Canadian corporation ("Holdco") finances an acquisition with notes ("Holdco Notes") or (if it is unable to successfully market the Holdco Notes) through a borrowing (the "Alternate Financing Facility"). Under both indebtedness, if a minimum EBITA is not achieved, and such failure is not cured by a contribution to Holdco and its direct and indirect subsidiaries (other than unrestricted subsidiaries), Holdco will be required to make an offer to repurchase the Holdco Notes (or to repay the debt under the Alternative Financing Facility). Failure to do so constitutes an event of default. Such terms would not cause the exemption in s. 212(1)(b)(vii) not to be available.

GAAR did not apply where a Canadian securitization trust, in order to borrow at favourable rates provided by an arm's length foreign lender, entered into a back-to-back financing arrangement under which the lender lent to a newly-incorporated Alberta corporation owned by a trust with a charitable beneficiary, and that corporation lent, on similar terms, to the trust.

In order to access the more favourable terms available in the U.S. markets, the general partner of a publicly-traded limited partnership borrows on a private placement basis from arm's length U.S. institutional lenders and on-lends on similar terms (but with a mark-up on the interest rate) to the partnership. A ruling that s. 245(2) will not apply given that there is a business purpose, and the structure has been in existence for some time.

A favourable ruling re loan by U.S. lenders to the corporate general partner of a Canadian partnership which on-lends, on similar terms, to the partnership, based on the structure providing better security for the lenders. An event of default includes net proceeds from asset sales not being reinvested in the business within 360 days.

The corporate general partner of a Canadian limited partnership operating a business in Canada borrows on an unsecured basis under a loan with a term of over twenty years from U.S. institutional lenders, and on-lends the funds on similar terms, but at a higher interest rate, to the limited partnership. Given that the interest rate on this borrowing is lower than the rate on comparable Canadian financings (such financings were even available, s. 245(2) would not be applied to alter the tax consequences of the borrowing by the general partner, including its exemption nature under s. 212(1)(b)(vii).

"Whether a change in the terms of a debt obligation results in a 'new' obligation for the purposes of subparagraph 212(1)(b)(vii) of the Act and/or for the purposes of other provisions of the Act is a question of fact to be determined on the basis of the law of contract in the relevant jurisdiction. In particular, [CCRA] accepts the ratio of the Federal Court of Appeal in General Electric Capital: that the term 'novation' is not included in subparagraph 212(1)(b)(vii) of the Act and that a novation is not required for there to be a new obligation for the purpose of subsection 212(1) of the Act. ... Where there has been a novation, rescission, or accord in satisfaction at law, it would usually mean that one contract/obligation has been replaced by a new contract/obligation".

A favourable ruling given where the issuer was required to make an offer to noteholders out of a specified portion of net after-tax proceeds of asset sales in excess of a stipulated amount to repurchase their notes out of such proceeds for their face amount plus accrued interest and a make-whole amount; and where the issuer was required, if it did not receive majority credit approval for the reinvestment of insurance and expropriation proceeds, to use such proceeds (to the extent not allocated to other facilities) to repurchase, in a specified proportion, the notes.

An otherwise eligible borrowing will qualify where the borrower is a partnership "all of the members of which:

When asked whether it would be an acceptable event of default respecting a note borrowing by a widely held corporation to refer to the direct or indirect acquisition of more than 35% of the voting power of the borrower's stock, the Directorate indicated that this was a question of fact which should be addressed in a rulings context but further stated that the words in s. 212(1)(b)(vii)(C) "may include many situations where the lender has included in the terms of the loan or agreement an event that is beyond their [sic] control and which in their view would pose a risk to their loan".

The controlling shareholder of the corporate borrower was a mutual fund trust which received most relevant services pursuant to management and services agreements with a company from whom the trust initially had purchased its assets. Termination of those agreements would be an acceptable event of default. Also the failure of the borrower to make an offer to repurchase the issued notes in the event of its failure to reinvest asset sale proceeds within a specified time was an acceptable event of default.

An extension of the maturity date of a debt obligation occurring in accordance with its original terms would generally not result in CCRA viewing there to have been a reissue of a new loan for purposes of s. 212(1)(b)(vii).

The presence of the following event of default would not be acceptable: "The occurrence or threatened occurrence of an event which, in the opinion of the lender, has a material adverse effect on the financial situation of the borrower." The phrase "in the opinion of the lender" would not be acceptable because the resulting discretion would give the lender control as to when a debt could be recalled. In addition, even without this phrase, the clause would not be acceptable because "the words are ambiguous and could give the lender virtually an open-ended opportunity to recall the obligation for reasons which they [sic] would consider material ... ."

Clarification that the conversion right referred to in #E9721405 and #E9824125 referred to situations where conversion was at the option of the holder rather than the issuer.

Amendments to notes to extend the maturity date, change the amortization schedule for principal and change the interest rate were ruled not to result in the issuance of new obligations for purposes of s. 212(1)((b)(vii) on the basis of a representation that such changes did not result in a novation or rescission of the notes and given that the amendments were approved by extraordinary resolution as contemplated in the existing trust indenture.

The loan agreement will not qualify if it requires the proceeds of sale of assets of the borrower to be applied against the loan if such sale is not listed as an event of default. "If, however, upon the sale of the asset the borrower is required to make an offer to repay the loan and the failure to make the offer is defined as a default under the terms of the loan, the asset sale would be considered a 'triggering event' that would not cause the exemption in 212(1)(b)(vii) to be denied."

The Directorate will consider in the context of a rulings application whether default by any member of a corporate group even if not a party to the credit agreement may result in acceleration of the obligations under the credit agreement. Rulings have been issued respecting defaults by sister or subsidiary corporations giving rise to a cross-default.

A Canadian subsidiary of a foreign parent issues units each consisting of a debt obligation, a guarantee of the parent and a put to the parent (called a warrant) for parent shares. The exercise price of the warrant is set at the time of issue. S.212(1)(b)(vii) applies to interest on the debt obligation (and no part of the consideration for the unit need be allocated to the warrant).

Where a partnership has lent to a Canadian corporation, the condition that the lender must be dealing at arm's length with the borrower is applied to the partnership rather than the partners.

A note would be offered at a significant discount from the stated principal amount and no cash interest would be payable thereon prior to a date that appeared to be after the fifth anniversary. RC ruled that the discount would be treated as interest for purposes of s. 212(1)(b)(vii) when paid.

Ruling given on a loan whose definition of change of control included a situation where persons other than existing holders became the beneficial owner of more than x% of the total voting power attributable to the common shares, and the existing owners beneficially own a lower percentage of the total voting power than such persons.

"Interest payments which fluctuate on the basis of a formula that seeks to determine the extent to which the stock price of the borrower either out-performs or under-performs the short-term money market index would fall within the broad concluding words of" the postamble.

The description of facts included a requirement on the Canadian issuer of notes to use asset sale proceeds, that had not been applied within the 360-day period to pay down more senior debt or purchase qualifying replacement assets, to repurchase the notes for the amounts owing.

Where a debt obligation provides that it is convertible at the option of the holder into another debt obligation of the same issuer provided that the issuer has first given notice to the holders allowing them to make such a conversion, the exemption in s. 212(1)(b)(vii) will not be available given the breadth of the phrase "under any circumstances": these words "include the situation of a possible payment by the issuer even where both the issuer and holder must independently take steps to cause the holder's right of conversion to be exercised.

Favourable ruling with respect to notes issued to U.S. residents that provide that upon the occurrence of a Change of Control (as defined), there is an Event of Default which the issuer may cure by making an offer to purchase all outstanding notes at a percentage of their principal plus accrued and unpaid interest.

The impetus for amendments to a trust indenture came from the taxpayer and the persons who took it over. Accordingly, the method chosen by the taxpayer to follow through on its voluntary offer to redeem debentures did not cause it to be considered to be obligated to redeem the debentures within five years of the date of their original issue.

Ruling given on a loan whose definition of change of control included a situation where persons other than existing holders became the beneficial owner of more than x% of the total voting power attributable to the common shares, and the existing owners beneficially own a lower percentage of the total voting power than such persons.

With respect to a situation where a taxable Canadian corporation made an offer to purchase at a premium outstanding notes that were eligible for the exemption under s. 212(1)(b)(vii), RC ruled that provided that the premium "cannot reasonably be considered to have been made in respect of the substitution of the Notes into another debt obligation", the premium will be exempt.

Where interest on a debenture is paid by way of the issue of a fixed number of common shares, it would appear that the interest would be computed, at least in part, by reference to a commodity price.

Where notes initially are issued on an unregistered basis to qualified investors in order to effect placement of the issue on a timely basis, the subsequent registration of freely tradeable notes in replacement of the initial note will not result in new indebtedness for purposes of s. 212(1)(b)(vii).

Where debentures are convertible only into prescribed securities, but there is an anti-dilution clause that provides that in the event of a reorganization, the debentures may become convertible into non-prescribed securities, the debentures will not qualify for the exemption.

"In a situation where interest is computed by reference to dividends paid or payable to shareholders of any class of shares of the capital stock of a corporation, the interest shall be deemed not to be interest for purposes of subparagraph 212(1)(b)(vii) of the Act, by virtue of the postamble thereto, notwithstanding that the dividend component of a particular formula at the time of payment of interest is nil."

The exemption in s. 212(1)(b)(vii) will not apply where the terms of a debt obligation require the debt to be repaid within five years from the date of issue in the event of a specified action taken by a party outside the issuer's control, such as a shareholder of the issuer.

Interest which fluctuates on the basis of fluctuations in the value of a foreign currency may be considered to be computed by reference to a "similar criterion" for purposes of the postamble.

The exemption will cease to apply if and when the debtor ceases to be at arm's length with the creditor and, conversely, will begin to apply if and when the debtor begins to be at arm's length with the creditor provided all other requirements are met.

Discussion of effects of assignments or assumptions of the debt.

Because the exemption applies only to interest that is "payable", i.e., accrued and owing, prepaid interest is not eligible for the exemption.

An interest gross-up clause will not disqualify the debt notwithstanding that when the gross-up clause comes into effect the debtor may consider that it has no practical alternative but to exercise its right to prepay the debt.

None of the exemptions in s. 212(1)(b) will apply to the taxable dividend received by a shareholder of a mortgage investment corporation, notwithstanding that such dividend is deemed to be interest.

The exemption will not apply to interest paid by a partnership of resident Canadian corporations unless all members of the partnership deal at arm's length with the non-resident recipient of the interest.

Where the terms and conditions of a debt obligation provide for legal defeasance at the time the obligation is issued, this may result in the issuing corporation being obliged to pay more than 25% of the principal within five years from the date of issue.

Once Regulation 6208 is passed, a non-resident should be entitled to a refund of withholding tax paid after December 19, 1986 on debentures convertible into prescribed securities.

The Fund is a listed mutual fund trust which is not fiscally transparent for U.S. tax purposes. It is not subject to SIFT tax as essentially its only assets are shares of "Can Holdco" and interest-bearing debt ("US Opco Notes") of the wholly-owned U.S. subsidiary of Can Holdco ("US Opco"). US Opco uses the periodic proceeds of issuances by it of US Opco Notes and shares to acquire properties in the U.S.

Distributions by the Fund to its unitholders are funded out of interest received by it on the US Opco Notes and by return-of capital distributions received by it on its shares of Can Holdco (which in turn would be funded by return-of capital distributions received by Can Holdco on its shares of US Opco.) The Fund deducts under s. 104(6)(b) to the extent of its income. The units held by unitholders will include units to be issued on conversion of convertible debentures of the Fund.

Rulings that:

• To the extent that a portion of a distribution from the Fund to a non-resident unitholder is in excess of the amount that is included in the unitholder's income of such unit holder under s. 104(13), s. 212(1)(c) will not apply so that the Fund is not required to withhold.
• If the distribution is made to a unit holder who qualifies for the benefits of the Canada-U.S. Tax Treaty, the portion of the distribution made out of income earned outside of Canada is not subject to Part XIII tax as it satisfies the exemption in Art. XXII of the Canada-U.S. Tax Treaty.

Shares of a Canadian-controlled private corporation held by the estate were redeemed for cash proceeds, with the resulting deemed dividend paid out of the corporation's capital dividend account. Would this amount when redistributed to a non-resident be subject to Part XIII tax? CRA responded:

Any capital distribution made by a trust or an estate is subject to Part XIII tax to the extent that it is an amount described in subparagraph 212(1)(c)(i) or (ii)… .Subparagraph 212(1)(c)(ii)… provides that an amount that may reasonably be considered to be a distribution of, or derived from, a "dividend that is not a taxable dividend" (e.g. a capital dividend) received by the trust or estate on a share of the capital stock of a corporation resident in Canada is subject to Part XIII tax. Part XIII tax must be withheld by the payer and remitted on behalf of the non-resident… .

When a capital dividend (arising from insurance proceeds) received by an estate is used for the payment of estate taxes, would the distribution of the remainder of the estate to the heirs be excluded from the application of ss. 212(11) and 212(1)(c)? CRA responded:

[A]lthough an amount paid in favour of a Canadian estate as a capital dividend is used for the payment of estate taxes, the question of determining if a subsequent distribution in favour of non-resident beneficiaries can reasonably be considered to be a distribution of an amount received by the estate, or derived from such an amount, as a dividend is a question of fact. … Where applicable, the distribution would be subject to a withholding tax pursuant to subsection 212(11) and paragraph 212(1)(c)… .