Canada: CRA’s Acceptance Of "Triggering Events"

Last Updated: June 7 2005

Article by Sheldon Vanderkooy, ©2005 Blake, Cassels & Graydon LLP

This article was originally published in Blakes Bulletin on Taxation - April 2005.

Under the withholding tax exemption provision in subparagraph 212(1)(b)(vii) of the Act, the lender may require early repayment of the debt in the event of a failure or default under the terms of the debt. However, there are numerous occasions in which the parties will agree to require early repayment of all or a portion of the debt, but do not wish there to be a default, as a default will typically accelerate all of the debt and have other consequences, including causing cross defaults on other indebtedness of the borrower. This article addresses the Canada Revenue Agency (the CRA) practices allowing the use of "triggering events" to provide for potential prepayment of the debt within 5 years, without the borrower necessarily defaulting under the terms of the debt.

Structuring Triggering Events

In order to satisfy both the requirements of the 5/25 exemption and the commercial objectives of the parties, loans have provided for triggering events. The basic mechanism for a triggering event is that the occurrence of some event (such as material asset sales or a change in control of the borrower) will be considered as an event of "failure" under the terms of the debt. It is significant that an event of "failure" will not have the consequences of an event of default under the terms of the debt. Rather, upon an event of failure, the terms of the debt will require the borrower to make an offer to prepay all or a portion of the remaining principal balance. If the borrower does not make an offer to prepay as required, this would constitute an event of default under the terms of the debt and, therefore, typically accelerate all of the debt. This mechanism depends on maintaining a distinction between the borrower being required to prepay a certain amount of the debt (which is not acceptable to the CRA) and a borrower being required to offer to prepay.

Legal Basis

There are two bases for concluding that triggering events do not result in a failure to meet the requirements of the 5/25 exemption. First, the borrower is only required to make an offer to prepay a portion of the debt, and the borrower is not technically required to repay any amount. Second, such an obligation only arises upon an event of failure and, therefore, is an exception contemplated by clause 212(1)(b)(vii)(C). As both these bases are technical and subject to uncertainty, and as there has not been any case law addressing what is an acceptable event of failure or default for the purposes of the 5/25 exemption, in our view the CRA’s acceptance of triggering events should be viewed as an exercise of its administrative discretion. Therefore, other than in circumstances specifically addressed by the CRA in its published administrative policy and rulings, it is advisable that an advance tax ruling be obtained prior to utilizing a triggering event.

Types of Triggering Events

The CRA’s published administrative policy in Income Tax Technical News No. 9 is that they will accept circumstances such as (i) change of control of the borrower, (ii) ratings decline, or (iii) material asset sales, as being acceptable events of failure or default (triggering events) under a particular loan agreement although they might not be listed defaults under the terms of the agreement. Numerous rulings issued by the CRA have also allowed receipt of material insurance or expropriation proceeds as triggering events.

A recently released private income tax advance ruling is of interest in that it provided for a triggering event based on the borrower’s failure to maintain minimum earnings before interest, taxes, depreciation and amortization (EBITDA). Such a failure could be cured via a subscription for shares or other securities, with the cash proceeds of such subscription used to pay debt until a specified leverage ratio is obtained. If the failure is not so cured, the borrower could be required to make an offer to prepay a portion of the debt. The described purpose of this triggering event is to provide the lenders with flexibility as to whether to terminate the financing if the minimum EBITDA "represented to be achievable is not in fact achieved (or cured, if not achieved)". Significantly, the advance tax ruling specifically noted that the lender and the borrower spent significant time analyzing the historical results of the borrower, and reasonably expected the borrower to maintain the minimum EBITDA. Therefore, the minimum EBITDA requirement cannot be said to be a contrived means of requiring the borrower to prepay a portion of the debt prior to five years.

The use of triggering events is reflective of borrowers and lenders wishing to provide for potential mandatory prepayment if certain events occur, without necessarily providing for a full default of the debt. So long as the triggering event is based on unanticipated changes to the risk profile of the borrower and is outside the control of the lender, the use of triggering events will not contravene the policy objectives of the five year debt exemption in 212(1)(b)(vii). The CRA’s acceptance of a triggering event based upon EBITDA is a welcome development, as it suggests that the CRA is open to bona fide triggering events based on changes to the commercial risk associated with a loan that were not within the expectations of the parties at the time of entering into the loan. In other words, an event that would have been acceptable to the CRA as an "event of default" appears likely to be acceptable to the CRA as a "triggering event". However, given the uncertainty of the legal effectiveness of triggering events, it is advisable that an advance tax ruling be obtained prior to utilizing any triggering event other than those circumstances clearly accepted by the CRA in its published administrative policy and advance tax rulings, being (i) change of control of the borrower, (ii) ratings decline, (iii) material asset sales, (iv) receipt of material insurance or expropriation proceeds, or (v) failure to maintain minimum EBITDA (new ruling).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
16 Oct 2018, Seminar, Toronto, Canada

Join Blakes lawyers for our 10th annual overview of recent legal and regulatory developments and practical strategies to navigate the changing regulation of Canada’s payments industry.

26 Oct 2018, Other, Vancouver, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

30 Oct 2018, Other, Toronto, Canada

Please join us for discussions on recent updates and legal developments in pension and employee benefits as well as employment law issues.

 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions