2018-0766771R3 Commodity linked notes

Principal Issues: Whether the payments on a note that are linked to XXXXXXXXXX prices constitute participating debt interest under subsection 212(3).

Position: No.

Reasons: The commodity is not sufficiently linked to the profitability of the issuer’s business.

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

XXXXXXXXXX                                                                                                                                          2018-076677

XXXXXXXXXX, 2018

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling
        XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you requested an Advance Income Tax Ruling (the “Ruling”) on behalf of the above-named taxpayer. We also acknowledge the information provided in subsequent correspondence in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues involved in the Ruling request is:

(a)   in an earlier return of the taxpayer or a related person;

(b)   being considered by a Tax Services Office or Taxation Center in connection with a previously filed tax return of the taxpayer or a related person;

(c)   under objection by the taxpayer or a related person;

(d)   before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(e)   the subject of a Ruling previously issued by the Directorate.

Unless specified otherwise, all statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the “Act”) and all references to monetary amounts are in Canadian dollars.

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

DEFINITIONS

(a)   “ACo” means XXXXXXXXXX;

(b)   “CRA” means the Canada Revenue Agency;

(c)   “Early Redemption Amount” has the meaning set out in paragraph 20 below;

(d)   “Events of Default” has the meaning set out in paragraph 23 below;

(e)   “Failure to Deliver Redemption Amount” has the meaning set out in paragraph 16 below;

(f)   “Final Redemption Amount” has the meaning set out in paragraph 12 below;

(g)   “Final Valuation Date” has the meaning set out in paragraph 12 below;

(h)   “XXXXXXXXXX Entitlement” has the meaning set out in paragraph 13 below;

(i)   “Issue Date” has the meaning set out in paragraph 5 below;

(j)   “Maturity Date” has the meaning set out in paragraph 11 below;

(k)   “Note” or “Notes” means the senior, unsecured notes to be issued by ACo, as described in paragraph 4 below;

(l)   “Noteholder” or “Noteholders” has the meaning set out in paragraph 13 below;

(m)   “Principal Amount” has the meaning set out in paragraph 6;

(n)   “Special Circumstance” has the meaning set out in paragraph 19 below;

(o)   “Trade Date” or “Strike Date” means XXXXXXXXXX, being the day that is XXXXXXXXXX Business Days prior to the Issue Date; and

(p)   “Underlying” has the meaning set out in paragraph 12 below.

FACTS

1.    ACo is a XXXXXXXXXX.

2.    ACo’s head office is XXXXXXXXXX. Its Taxation Centre is XXXXXXXXXX and its Tax Services Office is XXXXXXXXXX. ACo’s business number is XXXXXXXXXX.

3.    ACo’s authorized capital includes common shares and an unlimited number of first preferred shares, without par value, XXXXXXXXXX. The first preferred shares may be issued, from time to time, in one or more series with such series designation, rights, privileges, restrictions and conditions as ACo’s board of directors may determine by resolution. The common shares, as well as the first preferred shares, XXXXXXXXXX, are listed on the XXXXXXXXXX.

TRANSACTIONS

4.    ACo has issued XXXXXXXXXX notes (the “Notes”).  The Notes were issued under ACo’s XXXXXXXXXX.

5.    The Notes were issued on XXXXXXXXXX (the “Issue Date”) in a private placement to an investor that is a non-resident of Canada. The holder may be XXXXXXXXXX.

6.    The Notes are denominated in XXXXXXXXXX and have an initial principal amount (the “Principal Amount”) of XXXXXXXXXX.  The Notes were issued for 100% of their Principal Amount.

7.    The Notes constitute direct, senior unsecured obligations of ACo. XXXXXXXXXX.

8.    The Notes are not principal protected.

Accrual and Payment of Interest

9.    The Notes are entitled to a coupon of XXXXXXXXXX% of their initial principal amount per annum.

10.   Interest will be paid annually, on each anniversary of the Issue Date.

Maturity

11.   The maturity date (the “Maturity Date”) of the Notes will be XXXXXXXXXX following the Issue Date.

12.   On maturity of the Notes, ACo will be required to pay an amount (the “Final Redemption Amount”) in XXXXXXXXXX determined as the product of (a) the Principal Amount, and (b) the amount determined by dividing (i) the official closing level or price of the XXXXXXXXXX Index (the “Underlying”) on the date (the “Final Valuation Date”) which is XXXXXXXXXX Business Days (as defined in XXXXXXXXXX) prior to the Maturity Date (or if such a day is not a Commodity Business Day (as defined in XXXXXXXXXX), the first following day which is a Commodity Business Day), by (ii) the official closing level or price of the Underlying on the Strike Date.

13.   Noteholders (“Noteholders”) holding XXXXXXXXXX% of the Notes outstanding may elect in respect of all, but not part only, of their holding of the Notes, by written notice, for physical settlement of the Notes in lieu of receiving the Final Redemption Amount.  Where a valid physical settlement election has been made, the Noteholder is entitled to receive a fixed XXXXXXXXXX (the “XXXXXXXXXX Entitlement”) determined by dividing the Principal Amount by the official closing level or price of the Underlying on the Strike Date.

14.   If a valid election for physical settlement has not been given at least XXXXXXXXXX Business Days prior to the Maturity Date, the Notes will be redeemed in XXXXXXXXXX at the Final Redemption Amount.

15.   Where a valid election for physical settlement has been given, the Maturity Date is subject to being postponed for up to XXXXXXXXXX Business Days where there occurs certain disruption events related to physical settlement.  For the avoidance of doubt, the Noteholders shall not be entitled to any amount or other payment by reason of any postponement of the Maturity Date.

16.   If physical delivery cannot be so effected within XXXXXXXXXX Business Days immediately following the original Maturity Date, then the Intermediary (as defined in XXXXXXXXXX) shall pay to the Noteholders an amount (the “Failure to Deliver Redemption Amount”) equal to the fair market value of the XXXXXXXXXX Entitlement on a day selected by the Intermediary, less the cost of unwinding any underlying related hedging arrangements, all as determined by the Intermediary (acting in its sole and absolute discretion).

17.   Where certain disruption events prevent physical settlement on each of the XXXXXXXXXX Business Days immediately following the original Maturity Date, the Intermediary may also elect, in lieu of physical delivery, to pay to the Noteholders the Failure to Deliver Redemption Amount on the XXXXXXXXXX Business Day following the date that notice of such election is given to the Noteholders.

Early Redemption

18.   Except as may be otherwise explicitly provided, the Notes will not be redeemable by ACo prior to the Maturity Date.

19.   ACo has the right to redeem the Notes early upon the occurrence of an event (a “Special Circumstance”) where, in the opinion of the ACo acting reasonably and in good faith, an amendment or a change is made to a taxation act or regulation, to taxation practices, policies or administration, to the interpretation of a taxation act or regulation or taxation practice, policy or administration; or an event occurs, now or in future, caused by circumstances beyond the control of ACo making it illegal or disadvantageous, from a legislative or regulatory point-of-view, or disadvantageous, from a financial point-of-view, for ACo to allow the Notes to remain outstanding.

20.   In the event of a Special Circumstance, ACo may, on written notice to Noteholders, redeem all, but not some only, of the Notes for an amount per Note (the “Early Redemption Amount”) determined by the Calculation Agent (as defined in XXXXXXXXXX) to be equal to the fair market value of the Note immediately prior to the date of redemption (including any accrued but unpaid interest thereon) (ignoring the event resulting in the early redemption of the Notes), plus or minus any related hedging gains or costs.

21.   ACo has the right to redeem all, but not some only, of the Notes, on XXXXXXXXXX (subject to postponement if the Final Valuation Date is postponed) for an amount equal to the Final Redemption Amount (plus any accrued but unpaid interest up to but excluding the date of redemption) upon the occurrence of certain conditions.  XXXXXXXXXX.

22.   Upon the occurrence of such an optional early redemption by ACo: (a) the Final Valuation Date shall be the day that is XXXXXXXXXX Business Days prior to the early redemption date (subject to postponement if it is not a Business Day); (b) the Noteholder may elect for physical settlement as set out in paragraph 13; and (c) the terms related to the Final Redemption Amount calculation apply mutatis mutandis to the optional early redemption of the Notes as though references therein to the Maturity Date were references to the early redemption date.

Events of Default

23.   If any of the following events (an “Event of Default”) occurs and is continuing, the holder of any Note may give written notice that such Note is immediately repayable, whereupon the Early Redemption Amount of such Note together with accrued interest to the date of payment shall become immediately due and payable:

a)    if a default is made by ACo for more than XXXXXXXXXX days (in the case of interest) or XXXXXXXXXX days (in the case of principal) in the payment on the due date of interest or principal in respect of any of the Notes; or

b)    if ACo shall become insolvent or bankrupt, or if a liquidator, receiver or receiver and manager of ACo or any other officer having similar powers shall be appointed or if the Office of the Superintendent of Financial Institutions Canada shall have taken control of the assets of ACo or of ACo itself.

Other Terms and Conditions

24.   ACo’s credit rating is XXXXXXXXXX.  The Notes will not be specifically rated.

25.   The Notes will not be listed on any stock exchange.

26.   All payments of principal and interest by ACo under the Notes in respect of the Maturity Date or the early redemption date, as may be applicable, may be made with withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatever nature imposed or levied by or on behalf of Canada, its provinces or territories unless XXXXXXXXXX. If any such withholding or deduction is made, ACo will not be required to pay additional amounts in respect of the amounts so withheld or deducted.

27.   The terms and conditions of the Notes will allow the Calculation Agent (and under circumstances in relation to a physical settlement of the Notes, the Intermediary) to make adjustments or take any other appropriate action if circumstances occur where the Notes or any calculations or other acts thereunder are affected by market disruption, adjustment events or circumstances affecting normal activities.

28.   On or prior to the Trade Date, ACo, through its affiliates or others, hedged and ACo will likely continue after the Trade Date to hedge its anticipated exposure under the Notes by taking positions in the Underlying, in option contracts on the Underlying or positions in any other available securities or instruments.

29.   Exposure to the Underlying is notional and an investment in the Notes is not an investment in the Underlying. Although the performance of the Underlying will have an effect on the Notes, the Underlying and the Notes are separate obligations of different legal entities.

ADDITIONAL INFORMATION

30.   The Notes will be governed by the laws of the XXXXXXXXXX and the federal laws of Canada applicable therein.

PURPOSE OF THE TRANSACTIONS

31.   The purpose of the transactions is to obtain financing to be used for general corporate purposes.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, transactions, and purpose of the transactions, and provided further that the transactions were carried out as described above, our Ruling is as follows:

A.    Subparagraph 212(1)(b)(ii) of the Act will not apply to any payments of interest as described in paragraph 9 or to any payments in respect of the Maturity Date or any early redemption date (including any payments or deliveries of the Final Redemption Amount, the XXXXXXXXXX Entitlement, the Failure to Deliver Redemption Amount and the Early Redemption Amount).

The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R7 dated April 22, 2016 and are binding on the CRA.  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.

An invoice for our fees in connection with this ruling will be forwarded to you under separate cover.

Yours sincerely,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate

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