Principal Issues: Whether various circumstances are acceptable events of default
Position: Perhaps, depends on all relevant facts
Reasons: Not possible to provide a definitive answer given limited information provided
2006-017410 XXXXXXXXXX S. Chua, LLB(Hons), FCA (613) 957-2100 April 13, 2006
Dear XXXXXXXXXX
Re: Technical Interpretation - Asset sale and subparagraph 212(1)(b)(vii)
We are writing in response to your request for a technical interpretation on the application of subparagraph 212(1)(b)(vii) of the Income Tax Act in various circumstances that involve the requirement of a debtor to make an offer to repay borrowings out of the proceeds of an "asset sale". Failure to make such an offer was listed as an event of default under the terms of the lending agreement.
Each of the hypothetical situations you described involved a Canadian corporate borrower that had a number of subsidiaries. In the first situation, the definition of "asset sale" included the sale or disposition in any manner by the borrower of an equity interest in any subsidiary in which the borrower held ownership interest that represented more than 50% of the voting power of a subsidiary. In the second situation, the definition of "asset sale" included the sale or issuance by any subsidiary of an equity interest in itself. You want to know if subparagraph 212(1)(b)(vii) would apply in those situations. You then ask if our opinion would change if: (a) the subsidiaries were guarantors of the borrowing; (b) the subsidiaries' assets and operations were included in the calculations set out in the lending agreement to determine whether the company had met the financial covenants; and (c) where neither (a) or (b) occurred.
Our Comments
As stated in Income Tax Technical News No. 9, we will continue to maintain that in order to be acceptable, the events of failure or default must have commercial reality, must be beyond the control of the lender and must not be contrived. We are unable to comment more specifically on the hypothetical situations described as all the relevant facts and documents must be examined to determine whether subparagraph 212(1)(b)(vii) applies. Accordingly, we would only be prepared to deal with your request in the context of an advance income tax ruling request.
Yours truly,
Roberta Albert, CA
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate