CRA apparently finds that exercising a right to pay interest with common share issuances does not render the interest non-deductible

In the context of foreign affiliate dumping transactions which occurred before the introduction of the new FAD rules, a Canadian subsidiary issued debentures to its U.S. parent which provided that the interest coupons could be satisfied with the issuance of common shares, which in fact occurred. Head Office opined that this feature by itself would not cause the interest to be non-deductible.

It also implicitly took a Backman (and Memec) approach to applying U.S. commercial law in that, although the debentures were governed by U.S. law, it treated the question of whether they were a debt obligation as an issue to be addressed under Canadian jurisprudential principles.

Neal Armstrong.  Summary of 12 February 2014 Memo 2012-0443391I7 under s. 20(1)(c).