2009-0320231C6 indicated 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).
CRA’s position is now that, where there is a conversion of a standard convertible debenture issued by Canadian public entities (i.e., taxable Canadian corporations, resident trusts or Canadian partnerships), in general there will be an excess under s. 214(7) equal to the amount by which the fair market value of the common equity received on the conversion exceeds the price for which the debenture was issued. This new position will be applicable on a prospective basis for convertible debentures that are issued after December 3, 2024.
However, CRA is still of the view that the deemed payment of interest on standard convertible debentures under s. 214(7) does not generally constitute “participating debt interest” as defined in s. 212(3).
A follow-up question noted that a s. 214(7) excess received by a holder of a convertible debt who did not deal at arm’s length with the issuer would not qualify for exemption under s. 212(1)(b)(i)(A). CRA indicated that a convertible debenture issued to a non-arm’s length person prior to December 3, but with that conversion feature having not yet been exercised, would essentially be grandfathered.