In a departure from 2009-0320231C6 (which indicated that there generally will be no excess under s. 214(7) on the conversion by the original holder of a “traditional” convertible debenture), CRA stated that, where there is a conversion of a standard convertible debenture issued by a Canadian public entity (i.e., taxable Canadian corporation, resident trust 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 applies prospectively to convertible debentures 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 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.