Principal Issues: The corporation was a financing subsidiary of a XXXXXXXXXX company. Both XXXXXXXXXX and the corporation are insolvent. The XXXXXXXXXX is subject to a winding-up order; the corporation is bankrupt. XXXXXXXXXX To facilitate the wind-up of the corporation's affairs, the trustees of the corporation and XXXXXXXXXX agreed to a two-step distribution process. First, a sufficient amount would be set aside to meet the claims of XXXXXXXXXX . Any excess known at that time (the "initial distribution") would be available for distribution to the arm's length creditors of the companies (the "ALCs"). Each ALC would receive certificates ("XXXXXXXXXX Certificate") at that time acknowledging their right to a pro rata share in any subsequent surplus that should become available for distribution once the XXXXXXXXXX claims had been satisfied. It was expected, at the time the certificates were issued (XXXXXXXXXX ), that little to no such subsequent distribution would be made. The certificates were issued pursuant to a trust indenture and qualify as securities XXXXXXXXXX . The liabilities of the XXXXXXXXXX have now been satisfied and the amount expected to be distributed to the ALCs in satisfaction of their entitlements under the XXXXXXXXXX Certificates will result in full payment of the claims proven in the bankruptcy together with deemed interest. The representatives of the corporation are seeking a ruling that the payments made to those non-residents in satisfaction of their interests under the XXXXXXXXXX Certificates will not be subject to withholding tax.
Position: To the extent that the Act deems a payment to be made in satisfaction of the accrued interest component of a Proven Claim or in respect of interest deemed to be payable under the BIA, withholding tax must be remitted by the Indenture Trustee, except where the debt in respect of which a creditor has proven its claim was exempt from withholding tax under paragraph 212(1)(b).
Reasons: In consideration for receiving the initial distribution and the XXXXXXXXXX Certificates, each of the ALCs settled their proven claims. Had the proven claims been satisfied directly from the bankrupt estate, rather than through the XXXXXXXXXX Certificate mechanism, a component of each proven claim would have been income subject to tax. Section 76 applies where a security or other right is received by a person in satisfaction of a debt to include in income the value of the security or right, to the extent that there would have been an income inclusion had the debt been paid. Subsection 214(4) provides that, where section 76 would have applied had the person been resident, the issuer of the right or security is deemed to have made a payment to the non-resident in the amount that would have been the income inclusion under section 76. Subsection 76(2) provides that, if the debt was not payable at the time of issuance of the security or right, the income inclusion would take place in the year that the debt would have been payable. On the facts, the proven claims would have been payable at the time that they were enforceable, which is, in our view, when the trustee in bankruptcy had funds available for distribution. Therefore, the Indenture Trustee is deemed to have made a payment subject to withholding tax in the year that the funds become available for distribution. Subsection 214(4) further provides that the deemed payment is deemed to have been made in respect of the original debts of the ALCs; therefore, if the claim proven by a creditor was exempt from withholding tax, there is no withholding obligation to the Indenture Trustee in respect of any payment deemed to have been made to that creditor.
