24 September 1990 Income Tax Severed Letter ACC9729 - Request for Determination of Requirement to Withhold

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

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)

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. Clar Chief Leasing & Financing Section Rulings Directorate Legislative & Intergovernmental Affairs Branch

c.c K. Hillier, Director Non-Resident Taxation Division