| 19(1) | File No. 5-8575 |
| M.M. Trotier | |
| (613) 957-8953 |
January 25, 1990
19(1)
Re: Subparagraph 212(l)(b)(vii) of the Income Tax Act (the "Act")
This is in reply to your letter of August 23, 1989 requesting a technical interpretation as to whether a legal defeasance effects novation for purposes of subparagraph 212(1)(b)(vii) of the Act. We apologize for the delay.
Whether or not a particular legal defeasance is a legal defeasance which effects novation can only be determined following consideration of all of the terms and conditions pertaining to the particular defeasance. We can, however, provide you with our general comments with respect to a hypothetical legal defeasance situation where the original Canadian corporate debtor which issued a debt obligation is totally released from its covenants under the debt obligation and is discharged of its obligations towards the non-resident creditor, the debtor's relationship with the creditor is severed and the creditor is entitled to look only to the trust, referred to below, for satisfaction.
The debtor discharges the debt obligation by transferring the obligation to a trust together with cash or a matching portfolio of securities. The trust is instructed to service and then retire the debt to the non-resident as it becomes due, using the income and principal from the transferred securities.
In circumstances where the legal defeasance is not a term of the original debt obligation, it is our view that such defeasance will give rise to a new obligation and result in a discharge of the old obligation. Accordingly, as the amounts which the trust pays as, on account or in lieu of, or in satisfaction of interest would not be interest payable by a corporation in respect of indebtedness issued by that corporation, the exemption provided for in subparagraph 212(1)(b)(vii) of the Act would not apply.
Where the terms and conditions of the debt obligation provide for a legal defeasance at the time the obligation is issued this may well result in the issuing corporation being obliged to pay more than 25% of the principal amount of the obligation within 5 years from the date of issue of that obligation. Accordingly the exemption in 212(1)(b)(vii) of the Act may not apply as at the date the obligation is issued.
As you are aware, there are other provisions of the Act which could possibly also apply as a consequence of a legal defeasance including section 80 and subsection 75(2) of the Act. Again this is a question of fact which can only be determined when dealing with the particulars of a specific case.
We trust that the above comments will be of assistance.
Yours truly,
ChiefFinancial Institution SectionFinancial Industries DivisionRulings Directorate