2014 Ruling 2014-0532411R3 - Convertible Notes & Part XIII Tax

Principal Issues: In the event of a conversion of a convertible note for common shares, whether the excess (if any) determined under subsection 214(7) would constitute "participating debt interest" as defined in subsection 212(3)?

Position: No.

Reasons: Based on the provisions of the convertible notes and indenture, wording of the relevant provisions, and CRA response to the question on convertible debentures at the CRA Round Table Discussion at the 2013 CTF 65th Annual Conference.

XXXXXXXXXX
2014-053241

XXXXXXXXXX, 2014

Dear XXXXXXXXXX,

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in response to your email of XXXXXXXXXX and your letter of XXXXXXXXXX, in which you advised us of additional facts and requested additional rulings to the rulings described in our letter dated XXXXXXXXXX, 2012 (the "Letter") on our file 2011-041872.

We also acknowledge receipt of additional information you provided to us in your emails dated XXXXXXXXXX.

Capitalized terms not defined herein are as defined in the Letter or in the Indenture.

As a result of your request, the following amendments are made to the Letter:

1. The following is added to the Definitions and Abbreviations of the Letter:

First supplemental indenture as described in FS Indenture
paragraph 8 of the Facts.

2. The following is added to paragraph 8 of the Facts of the Letter:

The Indenture was amended by the first supplemental indenture ("FS Indenture") made as of the XXXXXXXXXX. The amendments provided in the FS Indenture were authorized by ACO by Extraordinary Resolution as defined in section XXXXXXXXXX of the Indenture.

3. The following paragraph 16.1 is added to the Proposed Transactions of the Letter:

When ACO exercises its right to convert a Class XXXXXXXXXX Note into Common Shares as provided and in the form required by section XXXXXXXXXX of the Indenture, PUBCO will (subject to its right to make an Optional Settlement Payment) issue Common Shares to ACO pursuant to section XXXXXXXXXX of the Indenture, at the Conversion Price in effect on the date of conversion. The number of Common Shares to be issued to ACO is determined by dividing the principal amount of the Class XXXXXXXXXX Note by the Conversion Price in effect on the date of conversion.

However, if any fractional interest in a Common Shares would be deliverable upon the conversion of any principal amount of a Class XXXXXXXXXX Note, PUBCO shall, pursuant to the provisions of section XXXXXXXXXX of the Indenture, in lieu of delivering any certificate representing such fractional interest, make a cash payment to ACO of an amount equal to the Current Market Price (as defined in section XXXXXXXXXX of the Indenture) of such fractional interest.

4. The following paragraph 16.2 is added to the Proposed Transactions of the Letter:

XXXXXXXXXX.

5. The following paragraph 16.3 is added to the Proposed Transactions of the Letter:

On the conversion of Class XXXXXXXXXX Notes into Common Shares of the capital stock of PUBCO, the amount that will be added by PUBCO to the stated capital of the Common Shares will be equal to the principal of the Class XXXXXXXXXX Notes.

6. The following is added as ruling C. to the Rulings Given of the Letter:

For the purposes of paragraph 212(1)(b), any amount deemed to be a payment of interest on a Class XXXXXXXXXX Note under subsection 214(7) as a result of a conversion of the Class XXXXXXXXXX Note into Common Shares as described in paragraphs 16.1 or 16.2 above, will not be "participating debt interest" within the meaning of the definition in subsection 212(3).

7. The following is added as ruling D. to the Rulings Given of the Letter:

Any amount deemed to be a payment of interest on a Class XXXXXXXXXX Note under subsection 214(7) as a result of a conversion of the Class XXXXXXXXXX Note into Common Shares as described in paragraphs 16.1 or 16.2 above, will not be subject to Part XIII withholding tax under paragraph 212(1)(b), provided that PUBCO deals at arm's length with ACO at the time of the conversion.

8. The following is added to the Letter, after the Rulings Given and before the Comments:

OPINION

In our view, in the event of a disposition of a Class XXXXXXXXXX Note by ACO to a person resident in Canada (other than PUBCO) for proceeds of disposition payable in cash, any amount deemed to be a payment of interest on a Class XXXXXXXXXX Note under subsection 214(7) would not in general constitute "participating debt interest" within the meaning of the definition in subsection 212(3).

We confirm that the Rulings Given in the Letter will continue to be binding on the CRA, subject to the conditions set out in the Letter, even with the changes to the Facts and Proposed Transactions as described in the present letter.

The additional rulings C. and D. will apply solely to transactions realized after XXXXXXXXXX.

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

Yours truly,

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