Section 51.1 - Conversion of debt obligation

underline;">: Currrent structure. Canco1 is obligated to its affiliate (Canco3) under non-interest-bearing U.S.-dollar debt evidenced by demand notes ("Notes A") whose fair market value is substantially lower than their adjusted cost base (equal to their principal) to Canco3, and with there also being an accrued FX gain to Canco1.

Proposed transactions

Before engaging in transactions to eliminate such debt though ATR-66-style debt-slide transactions, the terms of the Notes A will be amended by adding a right allowing the holder to exchange them for new Canadian-dollar interest-bearing demand notes ("Notes B") - with the exchange rights then being exercised by Canco3.

Ruling

that s. 51.1 will apply, and ss. 80 and 39(2) will not apply, to such exchange.

See under s. 80.01(4) for detailed summary.

Ruling that s. 51.1 applied on conversion of one note into two new notes: a new senior and junior ranking note. See detailed summary under s. 80.01(4).

underline;">: Background. Forco holds a non-interest-bearing note (the Forco Note) of its Parent, which is in CCAA proceedings, as its only substantial asset. The Partnership of which Parent is the majority partner and a CBCA subsidiary of Parent (Subco) is the other partner, holds, as its only asset, a U.S. dollar non-interest-bearing note (the GP Note) owing by Parent with a latent FX capital loss to the Partnership.

Proposed transactions

:

1. The terms of the Forco Note will be amended to change its governing law, and to make it convertible into a new interest-bearing note (the "New Forco Note"), with neither amendment resulting in a novation; and the Forco Note will be converted into the New Forco Note.
2. The GP Note will be converted into the New GP Note similarly to 1.

Further transactions are implemented to eliminate the two notes in ATR-66-style transactions.

Rulings

:

• The amendments/governing law changes in 1 and 5 will not result in a disposition of the Notes.
• S. 51.1 will apply to the conversions in 1 and 5 such that Forco and the Partnership will be considered to dispose of the Notes for their ACB and to have reacquired them for the same amount.

See complete summary under s. 80.01(4).

Where a debt obligation provides that it is convertible at the option of the holder into another debt obligation of the same issuer provided that the issuer has first given notice to the holders allowing them to make such a conversion, the rollover will be available on such a conversation because s. 51.1 applies at the point of conversion and, at that time, the terms of the debt obligation provides that the rollover is available. CRA stated:

Section 51.1...applies at a point in time, namely at the time of conversion. So long as the right to make the exchange is part of the terms of the debt obligation at that time the rollover will be available provided, of course, that the conditions in paragraphs 51.1(a) and (c) are also satisfied. Thus, a right of exchange which is part of the terms of the obligation from its inception or which becomes a term of the obligation at any time prior to the moment of exchange will satisfy paragraph 51.1(b)... .

Respecting whether s. 51.1 would apply to the conversion of a U.S.-dollar denominated convertible debenture, CRA noted that under s. 51.1(c) the principal amounts of the old and new obligations must be equal, quoted the "principal amount" definition in s. 248(1), and stated:

In order to establish the principal amount of an obligation, we must look at the amount of the obligation in the currency in which it must be repaid under the terms of the obligation. The principal amount of an obligation that must be repaid in U.S. dollars should accordingly be expressed in U.S. dollars. Therefore, section 51.1…could apply in respect of an exchange of obligations issued in a foreign currency.