2014-0523691R3 Non-Viable Contingent Capital

Principal Issues: 1) Is the interest deductible on the notes under paragraph 20(1)(c) of the Act? 2) Whether any interest paid or credited by ACo to non-residents, will be subject to withholding taxes under paragraph 212(1)(b) of the Act?

Position: 1) Yes. 2) No

Reasons: The requirements of paragraph 20(1)(c) are met. Deductibility under paragraph 20(1)(c ) is dependent upon there being a borrower and lender relationship between the parties to the Notes and such a loan exists until such time as a mandatory conversion event occurs. The mandatory conversion event is remote. 2) Payments on the Notes by ACo to non-residents, would not be subject to withholding taxes under paragraph 212(1)(b) of the Act. Aco deals at arm’s length with any potential non-resident note holders and the interest paid on the Notes does not meet the definition of “participating debt interest” as defined in subsection 212(3) of the Act.

Author: XXXXXXXXXX
Section: 20(1)(c), 212(1)(b), 212(3)

XXXXXXXXXX                                                                                                                            2014-052369

XXXXXXXXXX, 2014

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
      XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX wherein you requested an Advance Income Ruling on behalf of XXXXXXXXXX (“ACo”).

We understand that to the best of your knowledge and that of ACo, none of the issues involved in this ruling request are:

i)    dealt with in an earlier income tax return of ACo or a related person;
ii)   being considered by a tax services office or taxation centre in connection with a previously filed tax return of ACo or a related person;
iii)  under objection by ACo or a related person;
iv)   before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
v)    the subject of an income tax advance ruling previously considered by the Income Tax Rulings Directorate.

DEFINITIONS

(a)   “ACo” means XXXXXXXXXX;

(b)   “Act” means the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended; 

(c)   “Administrative Action” means any judicial decision, administrative pronouncement, published or private ruling, regulatory procedure, rule, notice, announcement, assessment or reassessment (including any notice or announcement of intent to adopt or issue such decision, pronouncement, ruling, procedure, rule, notice, announcement, assessment or reassessment);

(d)   XXXXXXXXXX;

(e)   XXXXXXXXXX;

(f)   XXXXXXXXXX;

(g)   “Common Shares” means the common shares described in paragraph 3 below;

(h)   “Conversion Ratio” means that number of Common Shares (rounding down, if necessary, to the nearest whole number of Common Shares) of ACo determined by the formula XXXXXXXXXX where XXXXXXXXXX is equal to the aggregate of (i) the Principal Amount of the Notes and (ii) the accrued and unpaid interest thereon up to and including the date of the XXXXXXXXXX;

(i)   “Government of Canada Redemption Yield” (“GOC Redemption Yield”) means, on any date, the arithmetic average of the annual yields, as determined by XXXXXXXXXX Canadian registered investment dealers, each of which will be selected by ACo, as being the annual yield to maturity on such date, which a non-callable Government of Canada bond would carry, assuming semi-annual compounding, if issued, in Canadian dollars in Canada, at XXXXXXXXXX% of its Principal Amount on the date of redemption with a maturity date of XXXXXXXXXX;

(j)   “XXXXXXXXXX Redemption Price” means the greater of (i) the Principal Amount and (ii) a price equal to the price per Note calculated to provide an annual yield thereon from the applicable date of redemption to, but excluding, XXXXXXXXXX, equal to the GOC Redemption Yield plus a spread, together in each case with accrued and unpaid interest thereon to, but excluding, the redemption date;

(k)   “Fixed Rate Notes” means Notes that bear interest at a fixed rate;

(l)   “Floating Rate Notes” means Notes that bear interest at a floating rate;

(m)   XXXXXXXXXX;

(n)   “Ineligible Person” means any person whose address is in, or whom ACo or its transfer agent has reason to believe is a resident of, any jurisdiction outside of Canada to the extent that the issuance or delivery by ACo to such person of Common Shares upon a XXXXXXXXXX;

(o)   “Initial Interest Reset Date” means a day that is on or around a certain anniversary of the day the applicable series of Notes are issued (for illustration, assume it is the XXXXXXXXXX anniversary);

(p)   “Interest Reset Date” means, in the case of Fixed Rate Notes, the Initial Interest Reset Date and a day that is every XXXXXXXXXX months thereafter, and in the case of Floating Rate Notes, a day that is XXXXXXXXXX months after the issue date and a day that is every XXXXXXXXXX months thereafter;

(q)   “Maturity” means the expiration of the term of the applicable series of Notes, which will not exceed XXXXXXXXXX years (for illustration, assume it is XXXXXXXXXX years);

(r)   “Note” or “Notes” means the XXXXXXXXXX indebtedness to be issued by ACo as described in paragraphs 4 and 5 below;

(s)   “Par Redemption Price” in respect of a Note means the aggregate of (i) the Principal Amount of the Note and (ii) any accrued and unpaid interest on the Note up to, but excluding, the applicable redemption date;

(t)   “Principal Amount” has the meaning assigned by subsection 248(1) and, in respect of each series of Notes, means $XXXXXXXXXX per Note;

(u)   “XXXXXXXXXX Date” means the date XXXXXXXXXX on which the applicable series of Notes (or any portion thereof) XXXXXXXXXX;

(v)   “XXXXXXXXXX Shareholder” means any person XXXXXXXXXX;

(w)   “XXXXXXXXXX Date” means a date that is a XXXXXXXXXX Date or a XXXXXXXXXX Date;

(x)   XXXXXXXXXX;

(y)   “XXXXXXXXXX Date” means the date on which ACo receives XXXXXXXXXX in Canada experienced in such matters (who may be counsel to ACo) to the effect that, as a result of
(
i)    any amendment to, clarification of, or change (including any announced prospective change) in, the laws, or any regulations thereunder, or any application or interpretation thereof, of Canada or any political subdivision or taxing authority thereof or therein, affecting taxation,

(ii)  any Administrative Action, or

(iii) any amendment to, clarification of, or change in, the official position with respect to or the interpretation of any Administrative Action or any interpretation or pronouncement that provides for a position with respect to such Administrative Action that differs from the theretofore generally accepted position, in each of case (i), (ii) or (iii), by any legislative body, court, governmental authority or agency, regulatory body or taxing authority, irrespective of the manner in which such amendment, clarification, change, Administrative Action, interpretation or pronouncement is made known, which amendment, clarification, change or Administrative Action is effective or which interpretation, pronouncement or Administrative Action is announced on or after the date of issue of the applicable series of Notes, there is more than an insubstantial risk (assuming any proposed or announced amendment, clarification, change, interpretation, pronouncement or Administrative Action is effective and applicable) that XXXXXXXXXX;

(z)   XXXXXXXXXX;

(aa) XXXXXXXXXX;

(bb) “Trust Indenture” means an indenture entered into between ACo and the Trustee dated as of XXXXXXXXXX, as supplemented from time to time;

(cc) “Trustee” means XXXXXXXXXX acting as trustee under the Trust Indenture or such other person appointed from time to time as trustee under the Trust Indenture; and

(dd) XXXXXXXXXX.

Our understanding of the relevant facts, the proposed transactions and the purpose of the proposed transactions, is as follows:

FACTS

1.    ACo is a XXXXXXXXXX. It is a “taxable Canadian corporation” and a “public corporation” within the meaning of subsection 89(1) of the Act. XXXXXXXXXX.

2.    ACo’s registered address is XXXXXXXXXX.  Its Taxation Centre is the XXXXXXXXXX Taxation Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office. Its business number is XXXXXXXXXX. ACo has XXXXXXXXXX year-end for tax purposes.

3.    ACo’s authorized capital includes common shares (the “Common Shares”), which are widely held and traded on the XXXXXXXXXX, and an unlimited number of XXXXXXXXXX preferred shares XXXXXXXXXX, issuable in more than one series. The XXXXXXXXXX preferred shares may be issued in a foreign currency.

PROPOSED TRANSACTIONS

4.    Subject, inter alia, to the receipt of a favourable advance income tax ruling, ACo proposes to issue Notes in one or more public offerings in Canada.

5.    Each series of Notes will be issued pursuant to the Trust Indenture. The Notes will be issued in denominations of $XXXXXXXXXX and integral multiples thereof and will be issued for an amount approximately equal to their Principal Amount. If issued at a discount, the issue price will not be less than XXXXXXXXXX% of their Principal Amount. ACo anticipates the offering to be for an aggregate amount of up to $XXXXXXXXXX.

6.    The Notes will constitute direct, unsecured, XXXXXXXXXX indebtedness of ACo and rank pari passu with all other unsecured XXXXXXXXXX indebtedness of ACo from time to time issued and outstanding, XXXXXXXXXX.

7.    A holder of Notes will have no right to vote at any meeting of shareholders of ACo and will have no right to participate in the profits of ACo. Subject to the XXXXXXXXXX, the Notes will rank superior to ACo shares in the event of ACo’s insolvency, liquidation, dissolution or winding up.

Accrual and Payment of Interest

8.    The Notes will bear interest from their date of issue at a rate which will reflect prevailing interest rates at the date of issue. From the date of issue to the Initial Interest Reset Date, the Fixed Rate Notes will bear interest at a fixed annual rate which will be payable semi-annually. The interest rate on the Notes will be reset on each Interest Reset Date to an interest rate per annum equal to the XXXXXXXXXX plus a spread, and will be payable quarterly. No interest on the Notes will accrue or be payable after the date of a XXXXXXXXXX.

Redemption

9.    Except as may be otherwise explicitly provided, the Fixed Rate Notes will not be redeemable by ACo prior to the Initial Interest Reset Date.  Floating Rate Notes may also not be redeemable prior to a date that may be specified in respect of such Notes.

10.   Subject to the immediately preceding paragraph, ACo may, at its option, and with the prior approval of the XXXXXXXXXX and on giving notice to the holders of the Notes, redeem all, but not less than all, of an outstanding series of Notes, by payment of an amount for each Note equal to the Par Redemption Price.

XXXXXXXXXX Redemption

11.   A series of Notes may contain provision that, upon the occurrence of XXXXXXXXXX Date prior to the Initial Interest Reset Date, ACo may, at its option and without the consent of any holder of the Notes, and XXXXXXXXXX and upon giving notice to the holders of the Notes, redeem all or part of the outstanding series of Notes by the payment of an amount equal to, in the case of Fixed Rate Notes, the XXXXXXXXXX Redemption Price, and in the case of Floating Rate Notes, the Par Redemption Price.

Repurchase

12.   ACo may, at any time, purchase Notes at any price or prices in the open market or otherwise. Notes so purchased by ACo may be held or resold or, at the discretion of ACo and with the consent of the XXXXXXXXXX, may be surrendered to the Trustee for cancellation.

Conversion

13.   The Notes will not be convertible into any other property except as described below. 

14.   Upon the occurrence of a XXXXXXXXXX, the Notes will be, and will be deemed for all purposes to be, automatically converted, without the consent of the holders thereof, into fully-paid and freely-tradable Common Shares based on the Conversion Ratio. There is no assurance that the conversion formula would result in the issuance of Common Shares having a fair market value when issued equal to at least the Principal Amount of the Notes. Fractions of Common Shares will not be issued or delivered pursuant to a XXXXXXXXXX and no cash payment will be made in lieu thereof.

15.   XXXXXXXXXX.

16.   Upon a XXXXXXXXXX, ACo reserves the right not to (i) deliver Common Shares to XXXXXXXXXX.

17.   XXXXXXXXXX.

Events of Default

18.   Events of default under the Notes will occur only if ACo shall become insolvent or bankrupt or subject to the provisions of the XXXXXXXXXX, or if ACo goes into liquidation, either voluntary or under an order of a court of competent jurisdiction, passes a resolution for the winding-up, liquidation or dissolution of ACo or otherwise acknowledges its insolvency. For greater certainty, a XXXXXXXXXX will not constitute an event of default. If an event of default occurs and continues and the Notes have not already been automatically exchanged for Common Shares of ACo, the Trustee may, in its discretion and shall upon the request of holders of not less than one quarter of the principal amount of the Notes then outstanding, declare the principal of and interest on all outstanding Notes to be immediately due and payable. There will be no right of acceleration in the case of a default in the payment of interest or a default in the performance of any other covenant of ACo, although a legal action could be brought to enforce such covenant. 

Maturity

19.   On Maturity, ACo will repay the Principal Amount of the applicable series of Notes then outstanding, together with all accrued but unpaid interest, in cash.

Other Covenants

20.   ACo will agree for the benefit of the holders of the Notes that ACo will not assign or otherwise transfer any of its obligations under the Trust Indenture, except in the case of a merger, amalgamation, reorganization or a sale of substantially all of the assets of ACo, as the case may be. 

PURPOSE OF THE PROPOSED TRANSACTIONS

21.   The purpose of the proposed transactions is to borrow money to be used for the purpose of earning income from a business or property (other than to acquire property the income from which would be exempt or to acquire a life insurance policy). XXXXXXXXXX.

RULINGS GIVEN

A.    Provided ACo has a legal obligation to pay interest on the Notes and the proceeds from the issue of the Notes are used and continue to be used for the purpose of earning income from a business or property, and the proceeds are not used to acquire a life insurance policy or property the income from which would be exempt, ACo will be entitled, pursuant to paragraph 20(1)(c) of the Act, to deduct in computing its income in respect of a taxation year an amount in respect of the Notes up to the lesser of (i) the interest paid in the year by ACo on the Notes or payable by ACo on the Notes in respect of the year (depending on the method regularly followed by ACo in computing its income for the purposes of the Act) and (ii) a reasonable amount in respect thereof.

B.    For the purposes of paragraph 212(1)(b) of the Act, amounts paid or credited by ACo on the Notes as, on account or in lieu of payment of, or in satisfaction of, interest will not be “participating debt interest” within the meaning of the definition in subsection 212(3) of the Act. Accordingly, such amounts will not be subject to Part XIII withholding tax under paragraph 212(1)(b) of the Act, provided that the recipient of such amounts deals at arm’s length with ACo at the time of the payments.

The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002 and are binding on the CRA provided that the proposed transactions are completed by XXXXXXXXXX. In addition, the above rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS:

Nothing in this ruling should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

(a)   the fair market value or adjusted cost base of any property or the paid-up capital of any shares referred to herein;

(b)   whether any person deals at arm’s length with ACo;

(c)   any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above; or

(d)   whether paragraph 20(1)(f) of the Act would apply to any discount on the Notes.

Yours truly,

XXXXXXXXXX
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2015

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2015