| September 24, 1990 | |
| Toronto District Office | Head Office |
| Source Deductions | Financial Industries Division |
| Mr. A.J. Johnson, Chief | C. Robb |
| (613) 957-2744 | |
| Attention: J. Fulton | |
| A/Group Head | 7-901652 |
| EACC9729 |
Subject: 24(1) Request for Determination of Requirement to Withhold
Your memorandum of July 5, 1990 to the Non-Resident Division regarding the above taxpayer was transferred to the Rulings Directorate for reply. We acknowledge receipt 24(1) The facts as we understand them are as follows:
Facts
24(1)
24(1)
24(1)
24(1)
Issue
The issue to be resolved is whether the conditions described in paragraph 7 above combined with the conditions described in paragraph 8 constitute an acceptable event of failure or default for the purposes of clause 212(1)(b)(vii)(C) such that interest paid or credited to a non-resident lender will be exempt from the subparagraph 212(1)(b)(vii).
Our Comments
1. It is our view that each of the events described in paragraph 5 above would be considered valid conditions of default which have been agreed to in negotiations between arm's length parties, are included in the terms of the Agreement and most importantly, are not within the control of the lender.
2. It is our view that an uncorrected decline in the borrower's credit rating would be considered an event of failure or default described in clause 212(1)(b)(vii)(C) in and of itself. Paragraph 15 of Interpretation Bulletin IT-361R2 provides as an example of an event of default the borrower's non-compliance with credit covenants. Similarly, principal and penalty payments made by the borrower to restore financial ratios agreed to in the loan agreement will not, in and by themselves, disqualify the interest payments from the exempting provisions of subparagraph 212(1)(b)(vii).
3. In question 1 of the 1989 Round Table, RCT stated that a change in control was an acceptable event of default where provided in the loan agreement. An advance income tax ruling is to be published shortly wherein one of the rulings given involved acceptance of a change in control as an event of default for purposes of clause 212(1)(b)(vii)(C). Control in these situations meant greater than 50% ownership of the corporation's voting shares.
4. It is not necessary that the arrangement qualify under the change in control position announced at the 1989 RCT Round Table as a rating decline in and of itself would be an acceptable event of failure or default. The resulting combination of factors makes an event of failure less likely since both conditions must be satisfied for the event to occur.
5. In our opinion, the event of failure described in the loan agreement and Trust Indenture supplied to us with the referral, which combines items 2 and 3 above, is an acceptable event of failure or default for purposes of clause 212(1)(b)(vii)(C). Therefore, it is our view that payments of interest to be made under the agreement will be exempt from the requirement to withhold Part XIII tax imposed by paragraph 212(1)(b) of the Act.
If we can be of further assistance in this matter please contact us.
J.C. ClarkChief Leasing & Financing SectionRulings DirectorateLegislative & Intergovernmental Affairs Branch
c.c. K. Hillier, DirectorNon-Resident Taxation Division