When asked to provide an update on its views expressed in 2013-0509061C6 on whether convertible debentures give rise to participating debt interest that is subject to Part XIII tax, CRA indicated:
- Since then, CRA has only issued 2014-0532411R3 (making amendments and adding an opinion regarding 2011-0418721R3) and 2013-0514551R3.
- 2014-0532411R3 provided that any amount deemed by s. 214(7) to be interest on the note conversion would not be participating debt interest, and would not be subject to Part XIII withholding tax (assuming the arm’s length test was satisfied) – and provided an opinion that in the event of a disposition of the convertible note by a non-resident to a resident (other than the issuer) for cash proceeds, the amount deemed to be a payment of interest under s. 214(7) would not constitute participating debt interest.
- 2013-0514551R3 provided similar rulings, which were also applicable to make-whole amounts.
- At 1 May 2009 IFA Roundtable Q. 12, 2009-0320231C6, CRA stated that, where there is a conversion of a traditional convertible debenture by its original holder for common shares of the capital stock of the issuer, there would generally be no excess under s. 214(7). However, since then, there has been additional information to be considered. For example, a 2010 Joint Committee submission stated that, in such a situation, the conversion premium realized on conversion or sale of a convertible debenture would constitute such an excess.
- Furthermore, the Agnico-Eagle decision has forced a CRA review of its position which, when completed, will be provided to the CTF, with any changes being applied only on a prospective basis.
- Finally, CRA is still of the view that the deemed payment of interest on convertible debentures under s. 214(7) arising on their transfer by a non-resident to a resident in Canada does not generally constitute participating debt interest, assuming the parties are dealing at arm’s length.