7 July 2008 External T.I. 2007-0255821E5 - normal growth guidelines - non-arm's length debt

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: In order for new equity issued in replacement of debt that was existing on October 31, 2006 to not count as new growth (as set out in the normal growth guidelines issued by the Department of Finance on December 15, 2006), does the debt need to be owed to an arm's length party?

Position: New equity that is issued in replacement of debt of an income trust that was outstanding on October 31, 2006, whether that debt was owed to arm's length party or a non-arm's length party, will not count as new growth of the income trust.

Reasons: Whether the creditor is dealing at arm's length or not with the debtor, the fundamental nature of the debt as being debt does not change. With a non-arm's length debtor, there may be concerns about the rate of interest or other terms of the debt, and the onus for establishing those terms and conditions in a non-arm's length situation will rest with the taxpayer (i.e., there are provisions in the Act which impose certain tax consequences when the terms and conditions are not the same as those that would be imposed between arm's length parties).

XXXXXXXXXX 	2007-025582
		Annemarie Humenuk
Attention:  XXXXXXXXXX 

July 7, 2008

Dear XXXXXXXXXX :

Re: Normal Growth Guidelines

This is in reply to your letter of September 28, 2007 in which you ask whether debt of an income trust must be debt owing to an arm's length party in order to qualify for the exception to the normal growth rules (the "Guidelines") issued by the Department of Finance on December 15, 2006.

The particular circumstances outlined in your letter appear to relate to a factual situation involving a specific taxpayer, namely the corporation you represent. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

As noted in the Guidelines, when a debt that was outstanding as of October 31, 2006 is replaced with new equity, whether through a debenture conversion or otherwise, the new equity is not considered growth for the purpose of determining whether a particular trust is considered a SIFT trust as defined in subsection 122.1(1) of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended for a particular year. This is true whether the debt is owing to an arm's length party or a non-arm's length party.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance to you.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch