Proposed Note issuance
A Canadian public corporation (ACO), whose common and preferred shares are traded on an exchange, will issue unsecured and unsubordinated notes to non-residents with whom it deals at arm’s length. The issue price will equal the Note’s principal and will correspond to the value of a ‘Reference Stock” on the date issued. The Reference Stock will be proposed by the noteholder but must be a listed stock of a non-resident issuer dealing at arm’s length with ACO and must have a correlation to ACO’s common shares that is lower than that of the S&P 500 index to ACO’s common shares. The Notes will bear interest at a stipulated rate expressed as a percentage of the Principal Amount.
At maturity, ACO will pay an amount equal to the closing price of the Reference Stock if it does not exceed the “Cap Price,” and otherwise will pay the Cap Price. ACO may elect to repay the Note at maturity with Reference Stock.
Ruling
S. 212(1)(b)(ii) will not apply to payments of interest described above or in respect of the Maturity Date made in cash or in Reference Stock.
The CRA summary stated:
Neither the payments of interest, nor payments on Maturity constitute "participating debt interest" under 212(3) because, consistent with the policy of the provision, the payments are not tied to the profitability of the issuer. In other words, the payments do not represent a disguised payment of profits out of Canada.