This update addresses various questions that have arisen recently regarding Canada’s decision to accelerate the elimination of withholding tax on arm’s-length (unrelated party) interest payments and the impact of the decision on cross-border securitization and loans.
Two recent developments will finally permit the tax-efficient securitization of billions of dollars of Canadian consumer and corporate receivables in US, European and other capital markets throughout the world. For the first time, structuring a cross-border securitization of interest-bearing Canadian receivables need not face the impediment of Canadian withholding tax.
The Canadian government recently announced that it would soon eliminate withholding tax on arm's-length payments of interest to US parties and other non-residents of Canada. Once implemented, this will significantly affect how Canadians raise debt capital for securitization and other structured finance products.
The forthcoming amendments to the Ontario Personal Property Security Act address three separate issues faced by receivables financiers in Ontario. Among other things, the amendment deals with the issue of the non-assignability of certain types of receivable, which are therefore not available as collateral.
In June 2005 the Canadian government repealed a 30% cap on the amount of foreign debt that certain Canadian investors could hold. Since then, non-Canadian issuers have raised more than C$22 billion in Canadian-dollar 'maple' bonds, converting the proceeds back to their home currency.
The amount financed in a revolving asset-based lending transaction is directly related to the borrowing base provided by the assets. Only assets that can be turned into cash in the medium-term business cycle are financed in this way - in other words, a borrower's inventory and receivables.
In recent years there has been a convergence in the mid-market financial services industry as capital providers have sought to provide a broader range of debt products. Confusion has arisen as to these types of debt product, with certain loan structures often being mislabelled, misunderstood or mistaken. Significant debt structures include cash-flow, second-lien and mezzanine lending structures.
The federal government has eliminated the federal capital tax, retroactive to January 1 2006. The elimination of the tax will facilitate the cross-border securitization of various classes of Canadian lease and interest-bearing receivable (both consumer and corporate) on a tax-effective basis.
The Supreme Court of Canada has declined a request by Telus Communications Inc (formerly BC Tel) for leave to appeal the Ontario Court of Appeal's decision in Metropolitan Toronto Police Widows and Orphans Fund v Telus Communications Inc. This is the only Canadian decision to date to consider the effectiveness of a sale under a classic Canadian securitization structure.
The Canadian securitization market has breathed a collective sigh of relief following the release of the Ontario Court of Appeal's long-awaited decision in the BC Tel Case. The appeal court accepted the trial judge's conclusion that the one-step sale common to many Canadian securitization transactions effectively produces a true sale of the securitized assets.
There is no persuasive argument for the asset-backed security (ABS) market in Canada to be regulated differently from the ABS market in the United States. Canadian securities regulators are therefore expected to harmonize existing Canadian ABS rules with those ultimately adopted in a US Securities and Exchange Commission final rule on ABS.