CRA rules that interest on NVCC sub debt is not participating debt interest for withholding purposes

Canadian banks such as Royal Bank and BMO have issued Basle III-compliant "non-viable contingent capital" sub debt, which looks like conventional debt except that it will be automatically converted into common shares, at the point of any "non-viability" as defined by OSFI (subject to regulatory discretion), based on a predetermined conversion formula which caps the number of common shares that may be issued, so that the holder potentially could suffer a loss.

CRA has ruled that this automatic conversion feature does not detract from current interest deductibility, or cause the interest to be participating debt interest for withholding tax purposes.

Neal Armstrong.  Summary of 2014 Ruling 2014-0523691R3 under s. 212(3) – participating debt interest.