In 2017-0690691E5 F, a 50% limited partner (Ms. X) funded her investment in a limited partnership (jointly owned with her husband) with a $3M bank loan that was secured by a pledge to the bank (the immediate funder) of a $3M term deposit held by a corporation equally owned by Mr. and Ms. X (Corporation B – the ultimate funder) with that bank. In finding that the back-to-back loan rules in s. 15(2.16) et seq. deemed Ms. X to owe $3M to Corporation B, CRA indicated that the condition in s. 15(2.16)(c) was met by virtue of s. 15(2.16)(c)(i)(B) (i.e., the bank had a $3M term deposit outstanding to Corporation B that was required in order for the $3M loan to Ms. X to remain outstanding). CRA stated that whether the pledge to the bank of the $3M term deposit also constituted a specified right was thus moot.
If instead of the $3M term deposit, Corporation B granted the bank a right to encumber one of its properties (e.g., a term deposit with another lending institution, a corporate-owned life insurance policy, or an investment in a mutual fund), would the bank have a specified right in respect of the encumbered properties, such that the condition in s. 15(2.16)(c)(ii) was not met? Would the condition in s. 15(2.16)(c)(i) be met?
Respecting the specified right issue, CRA stated:
If, under the arrangement between the parties, the bank can only exercise its right to encumber in order to secure payment of Ms. X’s $3M shareholder debt (for example, by placing a lien on the encumbered property to ensure that Corporation B cannot dispose of it without the bank’s consent), then the exception in parentheses would be met and the right to encumber would not constitute a specified right. However, if under the arrangement between the parties, the bank can exercise its right to encumber in order to raise capital for itself, then the exception in parentheses would not apply and the right to encumber would constitute a specified right.
Respecting s. 15(2.16)(c)(i), CRA stated:
[I]f we assume that the right to encumber does not constitute a specified right, then subparagraph 15(2.16)(c)(i) would not apply because the funder (i.e., the bank), and any person or partnership not dealing at arm’s length with the bank, does not have an amount outstanding as or on account of a debt or other obligation that is connected to the shareholder debt in the manner described in subparagraph 15(2.16)(c)(i)