Canada: Capital Markets Report - May 12-18, 2014

LEGAL BRIEFS AND COMMENTARY

Updates and commentary from Canada and around the world.

Convertible Debt and the Canadian Withholding Tax Dilemma

By: Matthew Peters

Canadian withholding tax on cross-border interest payments is generally much less of a concern today than it was just a few years ago thanks to taxpayer-friendly legislative and treaty-based amendments that have largely eliminated withholding tax on most arm's length (and certain non-arm's length) debt. However, an unusual Canadian withholding tax risk continues to exist in the context of debt issued by a Canadian-resident borrower to a non-resident lender where the debt is convertible into shares of the borrower. The potential withholding tax liability, which could be as high as 25% on both the coupon interest and the value of any premium realized upon the eventual conversion of the debt, could greatly reduce the anticipated returns to the non-resident lender if not appropriately understood and managed. The potential liability of the borrower (as well as personal liability for its directors) for failing to properly withhold and remit tax further heightens the sensitivity of the issue.

While the Canada Revenue Agency has provided administrative comfort that will be helpful in the context of certain "plain vanilla" convertible debt issued by public companies, the CRA unfortunately appears content to allow a degree of uncertainty to persist in certain circumstances, leaving clients and their advisors in a frustrating state of limbo.

Best practices and strategies have evolved to assist lenders and borrowers mitigate the potential tax liability; however, a thorough understanding of the issues and careful structuring of the convertible debt at an early stage is critical to proper risk management.

Our full article which can be accessed by clicking here outlines the basic Canadian withholding tax landscape relating to cross-border arm's length debt, describes the evolution of that landscape as it relates to convertible debt and describes various means of addressing the convertible debt withholding tax "problem."

PUBLIC COMPANY ACTIVITY

Information and intelligence about what public companies are doing in the market

Public Offerings

Launched May 5, 2014 - May 9, 2014

Equity Offerings

Debt Offerings

Upcoming Shareholder Meetings

• On June 12, 2014, the shareholders of Anfield Nickel Corp. will be asked to vote to approve a transaction between Anfield and Cunico Resources N.V., pursuant to which Cunico will acquire all of the issued and outstanding shares of Anfield's wholly owned Guatemalan subsidiary, Mayaniquel S.A.
• On June 10, 2014, the shareholders of McGraw-Hill Ryerson Limited will be asked to vote to approve a plan of arrangement pursuant to which McGraw-Hill Global Education Holdings, LLC will indirectly acquire all of the issued and outstanding common shares of McGraw-Hill Ryerson not already owned by McGraw-Hill Education.
• On June 6, 2014, the shareholders of Caracal Energy Inc. (formerly, Griffiths Energy International Inc.) will be asked to vote to approve a plan of arrangement pursuant to which Glencore International AG, through its wholly-owned subsidiary 8682321 Canada Inc., will acquire all of the outstanding common shares of Caracal.

WHAT WE'VE BEEN UP TO

Recent Transactions

We represented Dundee Securities Ltd. and a syndicate of agents in connection with a $11.47 million private placement of subscription receipts of Bedrocan Canada Inc. The announcement of the closing of the private placement was made in conjunction with the announcement that Bedrocan and POCML 2 Inc., a capital pool corporation, had also entered into a definitive agreement pursuant to which POCML 2 will acquire all of the issued and outstanding shares of Bedrocan as part of its qualifying transaction. Click here for more information.

We represented St. Vincent Minerals Inc. in connection with its acquisition by Galileo Resources Plc. St. Vincent's assets include the resource-estimate level Gabbs gold-copper property and a prospective Ferber gold-copper property in Nye County, and Elko County Nevada, USA.

We represented East Africa Metals Inc. in connection with its plan of arrangement with Tigray Resources Inc. Following the arrangement, East Africa holds all of the issued and outstanding shares of Tigray. Click here for more information.

We acted for Scotia Capital Inc. and Haywood Securities Inc., and a syndicate of agents, in connection with a $65 million offering of common shares of Altius Minerals Corporation. Altius intends to use the net proceeds of the offering to complete an acquisition, debt repayment and general corporate purposes. Click here for more information.

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.