2009 Ruling 2008-0300161R3 - Debt restructuring and forgiveness -- summary under Subsection 80.01(4)

Background

Parent, which is in CCAA proceedings, owns all but one share of Forco, which was incorporated outside Canada but whose central management and control is in Canada. Forco holds a non-interest-bearing note (the Forco Note) of Parent as its only substantial asset. The Partnership of which Parent is the majority partner and a CBCA subsidiary of Parent (Subco) is the other partner holds, as its only asset, a U.S. dollar non-interest-bearing note (the GP Note) owing by Parent with a latent FX capital loss to the Partnership.

Proposed transactions

:

1. The terms of the Forco Note will be amended to change their governing law, and to make it convertible into a new interest-bearing note (the "New Forco Note"), with neither amendment resulting in a novation; and the Forco Note will be converted into the New Forco Note.
2. XX months later, Forco will transfer the New Forco Note to a Canadian subsidiary of Parent (Canco1) in consideration for redeemable retractable non-voting preferred shares of Canco1.
3. Forco will reduce the nominal value of its shares to create distributable reserves, and pay a dividend-in-kind to Parent of such preferred shares.
4. Canco1 will be wound-up under s. 88(1) and Parent will file a s. 80.01(4) election in respect of the resulting settlement of the New Forco Note.
5. The GP Note will be converted into the New GP Note similarly to 1.
6. XX months later, the Partnership will transfer the New GP Note to a Canadian subsidiary of Parent (Canco2) in consideration for redeemable retractable non-voting preferred shares of Canco2.
7. The Partnership will be wound up so that Parent and Subco receive undivided interests in the Canco2 preferred shares.
8. Subco will pay a dividend-in-kind to Parent of such preferred shares.
9. Canco2 will be wound-up under s. 88(1) and Parent will file a s. 80.01(4) election in respect of the resulting settlement of the New GP Note.

Rulings

:

• The amendments/governing law changes in 1 and 5 will not result in a disposition of the Notes.
• S. 51.1 will apply to the conversions in 1 and 5 such that Forco and the Partnership will be considered to dispose of the Notes for their ACB and to have reacquired them for the same amount.
• Such conversions will not give rise to a forgiven amount to Parent nor (in the case of the GP Note) a s. 39(2) gain to it.
• Ss. 40(2)(e.1) and 53(1)(f.11) will apply to the Note transfers in 2 and 6, so that a denied capital loss will be added to the ACB of the Note to Canco1 or Canco2.
• The extinction of the Notes on the windings-up in 4 and 9 will not give rise to a forgiven amount to Parent nor (in the case of 9) a s. 39(2) gain to it.