Principal Issues: Whether a change of benchmark index in monetization arrangements entered into in XXXXXXXXXX would trigger the application of section 80.6.
Position: No.
Reasons: See below.
XXXXXXXXXX 2021-088064
XXXXXXXXXX 2021
Dear Sir,
Subject: Request for an advance income tax ruling
XXXXXXXXXX.
This is in response to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of XXXXXXXXXX. We have also taken into account the information you have sent us by email, as well as additional information submitted during telephone conversations (XXXXXXXXXX).
To the best of your knowledge and that of the taxpayers involved, none of the proposed transactions or matters covered by this application are the same as or substantially comparable to any transaction or matter that:
i. was addressed in a previously filed tax return of the taxpayer, or a related person, that is
A. is under review by the Canada Revenue Agency with respect to that return;
B. is the subject of an objection by the taxpayer or the related person;
C. is the subject of a legal proceeding, either in progress or completed, involving the individual or the related person;
ii. has been the subject of an advance ruling request previously reviewed by the Income Tax Rulings Directorate.
Definitions
Unless otherwise stated:
i. all statutory references are to provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act")
ii. all words and expressions used in this application and defined in the Act shall have the meaning given to them in the Act;
iii. all monetary amounts are in Canadian dollars;
iv. words importing the singular number shall include the plural and vice versa, if the context so requires.
In this letter, with the exception of Paragraph 14, the parties involved in the proposed transactions (described below) will be identified as follows:
"Aco" means the XXXXXXXXXX corporation;
"Holdco A" means the XXXXXXXXXX corporation;
"FI" means XXXXXXXXXX.
The following abbreviations, terms and expressions have the meanings described below:
"CCPC" means "Canadian-controlled private corporation" as defined in subsection 125(7).
"Class A Shares" means the Class A subordinate shares in the capital stock of Aco, XXXXXXXXXX;
"Loan Agreement" means the agreement between Holdco A and FI, as described in paragraphs 15 to 18 of Advance Ruling 2007-0246461R3.
"Monetization Agreement" refers to the agreements entered into on XXXXXXXXXX between Holdco A and FI, as described in Advance Rulings 2007-0246461R3 and 2008-0276821R3;
"Proposed Transaction" means the transaction described in ¶ 12;
"public corporation" has the same meaning as in subsection 89(1);
"Reference Shares" means, in respect of Holdco A, the XXXXXXXXXX Class A shares of the capital stock of Aco described in Advance Ruling 2007-0246461R3, as amended in Advance Ruling 2008-0276821R3;
"TCC" means "taxable Canadian corporation" as defined in subsection 89(1);
"Forward Agreement" means the agreement entered into between Holdco A and FI, as described in paragraphs 10 to 13 of Advance Ruling 2007-0246461R3.
Facts
1. Holdco A is a CCPC and a TCC.
2. Aco is a public company and a TCC.
3. During the period from XXXXXXXXXX to XXXXXXXXXX, the market price of Aco's Class A shares on the XXXXXXXXXX Exchange ranged from $XXXXXXXXXX (low) to $XXXXXXXXXX (high). At the close of business on XXXXXXXXXX, the price was $XXXXXXXXXX.
4. As of the date hereof, the Monetization Agreement is still in effect and has not been amended.
5. XXXXXXXXXX is a XXXXXXXXXX reference rate. The XXXXXXXXXX Index is administered by XXXXXXXXXX. Under the Monetization Agreement, the XXXXXXXXXX Index is used to set the XXXXXXXXXX rate ("AB Rate"). Specifically, the XXXXXXXXXX Index is used to calculate:
(i) the loan interest rate (the "Loan Interest Rate") for the Loan Agreement; and
(ii) the reference price (the "Reference Price") for the Forward Agreement.
6. In accordance with Article XXXXXXXXXX of the Loan Agreement, the principal amount of the loan bears interest at a rate per annum fixed on each annual payment date equal to the Loan Interest Rate on that date, plus a fixed borrowing charge equal to the "Established Charge", as that term is defined in the Loan Agreement. The term "Loan Interest Rate" is defined in Schedule XXXXXXXXXX to the Loan Agreement as follows:
"XXXXXXXXXX Loan Interest Rate".
7. The last annual interest payment date was XXXXXXXXXX and the Loan Interest Rate for that period was XXXXXXXXXX%. At the end of the period ended XXXXXXXXXX, the principal amount of the loan was $XXXXXXXXXX for Holdco A.
8. The Reference Price for each of the Reference Shares is defined in Article XXXXXXXXXX of the Forward Agreement and is equal to $XXXXXXXXXX plus an annual yield determined from the AB Rate, which is reduced by a discount of $XXXXXXXXXX. Article XXXXXXXXXX of the Term Contract defines "AB Rate" as follows:
"AB Rate means XXXXXXXXXX".
9. At the end of the period ending XXXXXXXXXX, the Reference Price for each Reference Share was $XXXXXXXXXX. The Reference Price for the XXXXXXXXXX Reference Shares of Holdco A was $XXXXXXXXXX.
10. XXXXXXXXXX has taken the decision to cease publication of, inter alia, the XXXXXXXXXX Index. As noted above, the agreements regarding the Monetization Agreement explicitly refer to the XXXXXXXXXX index in determining the Loan Interest Rate for the Loan Agreement and the Reference Price for the Forward Agreement.
11. The interpretation and application of the various agreements between Holdco A and FI relating to the Monetization Agreement shall be governed by the laws of the Province of XXXXXXXXXX and the federal laws applicable therein.
Proposed Transaction
12. With effect from periods commencing on XXXXXXXXXX, the following formula shall be used by FI to replace the XXXXXXXXXX Index (the "New Index") for the purposes of the Monetization Agreement:
The sum of :
(i) XXXXXXXXXX;
and
(ii) XXXXXXXXXX.
According to FI, the New Index is an approximation of the XXXXXXXXXX Index used since the entry into force of the Monetization Agreement.
Purpose of the proposed transaction
13. The purpose of the Proposed Transaction is to replace, due to the discontinuation of the publication of the XXXXXXXXXX Index by XXXXXXXXXX as of XXXXXXXXXX, the XXXXXXXXXX Reference Index with a comparable index for the purpose of determining the Loan Interest Rate for the Loan Agreement and the Reference Price for the Forward Agreement.
Additional Information
14. The main contact details for the taxpayer subject to the advance ruling are:
XXXXXXXXXX
Ruling
Provided that the statement of relevant facts, the Proposed Transaction and the additional information constitute full disclosure of all relevant facts and proposed transactions and that the Proposed Transaction is carried out as described above, our decision is as follows:
The substitution of the XXXXXXXXXX Index by the New Index will not result in the application of section 80.6 in relation to the Monetization Agreement.
This ruling is subject to the restrictions and general conditions set out in Information Circular 70-6R11 dated April 1, 2021, issued by the CRA and is binding on the CRA provided that the proposed Transaction described in ¶ 12 is completed by XXXXXXXXXX. This decision is based on the current Act and does not take into account any proposed amendments to it.
Other Comments
You stated that FI may eventually want to assign its rights and obligations under the Monetization Agreement to a third party. As this is not a proposed transaction, we cannot make an advance ruling on this matter. We are, however, able to offer the following general comments that may be helpful to you. The question of whether Holdco A could continue to benefit from the transitional measure to the application of the rules on synthetic dispositions in section 80.6 is a mixed question of law and fact that requires analysis of all the relevant facts and documents. Although it is not possible for us to reach a definitive conclusion, we are of the view that there is a reasonable argument that Holdco A could lose the benefit of the transitional relief to the extent that the assignment of the Monetization Agreement would have the effect of novating it.
Furthermore, the advance ruling should not be construed as an acquiescence on the part of the CRA that we have considered the other tax consequences that may result from the Proposed Transaction set out herein.
The statement of our fees for the time spent on your case will be sent to you under separate cover.
Best regards,
XXXXXXXXXX
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch