Convertible debentures have been and continue to be an extremely
popular capital raising instrument in Canadian capital markets.
Yesterday, Canada Revenue Agency (CRA) officials offered
some long-awaited comfort to public company issuers of convertible
debentures at the Canadian Tax Foundation's annual
conference in Toronto. As part of a roundtable discussion, CRA
officials confirmed that there should not be any withholding tax
arising on the conversion of a "standard convertible
debenture" issued by a Canadian public corporation and held by
a non-resident of Canada.
Since 2008, interest payments made by Canadian issuers to
non-residents have generally not been subject to Canadian
withholding tax unless the interest was "participating debt
interest", or the recipient did not deal at arm's length
with the issuer. In a ruling released by the CRA last year
(2011-0418721R3– Convertible Notes), the CRA found that
regular periodic interest payments on a convertible debenture
issued by a Canadian public corporation would not constitute
"participating debt interest". However, uncertainty
remained as to whether certain provisions of the Income Tax Act might deem a premium arising on
the conversion of a debenture to be "participating debt
interest" that would be subject to withholding tax. This
uncertainty has generally forced corporate issuers to try to comply
with specific conditions set out in the Income Tax Act and
published by the CRA in order to ensure that their convertible
debentures would be excluded from these deeming rules.
While these roundtable comments provide a welcome change, they
do not go all the way in addressing the uncertainty surrounding
withholding tax on convertible debentures. The comments were
expressly limited to "standard convertible debentures"
(as that term was defined in a letter from the Joint Committee on Taxation of the Canadian Bar
Association and the Canadian Institute of Chartered Accountants
sent to the CRA in May 2010) issued by public corporations, such
that some uncertainty will remain with respect to convertible
debentures issued by trusts, partnerships, and private
corporations. Nonetheless, even in these contexts, the comments
should offer some comfort as there is no principled reason why the
withholding tax rules should apply differently based on the nature
of the issuer.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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