Principal Issues: [TaxInterpretations translation]
What is meant by the substitution or conversion of a debt obligation by another debt obligation in subsection 18(9.1) of the Act?
Position:
For there to be such a substitution for the purposes of subsection 18(9.1), there must be between the creditor and the debtor a substitution of the original obligation by another obligation.
Reasons:
Text of the Act.
December 4, 2002
Sherbrooke Tax Services Office Headquarters
Audit Division Income Tax Rulings Directorate
Attention: Mr. Jean-Guy Pelletier Michel Lambert
(613) 957-89532001-013806
Callable debentures
This is further to your memo of April 30, 2002 requesting our opinion on the application of subsection 18(9.1) of the Income Tax Act (the "Act"). Your memo arises from ours dated April 12, 2002 and bearing the number 2001-011882.
THE FACTS
1. XXXXXXXXXX (the "Corporation") is a corporation governed by Part 1A of the Companies Act (Quebec) (the "CA").
2. Pursuant to a trust indenture signed on XXXXXXXXXX, the Corporation issued $XXXXXXXXXX of unsecured debentures due on XXXXXXXXXX. Subject to certain conditions, the debentures were redeemable at the option of the Corporation.
3. On XXXXXXXXXX, the Corporation repaid the balance of the debentures owing on that date, i.e., $XXXXXXXXXX for a total amount of $XXXXXXXXXX in cash. The minutes of the meeting of the Corporation's Board of Directors held on XXXXXXXXXX stated the following:
XXXXXXXXXX.
4. The redemption was made with the Corporation's surplus cash and with an unutilized portion of the bank credit available under an agreement entered into on XXXXXXXXXX. The debenture holders were persons other than the financial institutions that issued the bank credit facility.
5. The interest on the debentures was deductible pursuant to paragraph 20(1)(c) of the Act.
6. Subsection 18(9.1) does not apply to certain situations referred to therein, in particular where there is a substitution of a debt obligation by another debt obligation.
YOUR QUESTIONS
7. You wish to know what is meant by the substitution of a debt obligation by another debt obligation in subsection 18(9.1) of the Act and whether the Corporation has substituted its debentures with another debt obligation.
OUR OPINION
8. The Act does not define what constitutes the substitution of a debt obligation by another debt obligation. However, we are of the view that in order for there to be such a substitution for the purposes of subsection 18(9.1), there must be a substitution between the creditor and the debtor of another obligation for the original obligation.
9. In the situation that you have submitted to us, there was no replacement of the original obligation by another obligation between the Corporation and the debenture holders. In fact, the Corporation repaid the debenture holders. The fact that the Corporation financed, at least in part, the payment of the debentures through a revolving credit facility with financial institutions, which are persons other than the debenture holders, does not constitute the substitution of one debt by another.
ACCESS TO INFORMATION
10. For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope you find these comments of assistance.
Manager
Financing and Plans Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch