CRA finds that a payment to a lender based on equity value of the borrower was not eligible for the s. 20(1)(e) deduction

No s. 20(1)(e) deductions are available for amounts “computed by reference to revenue, profit, cash flow, commodity price or any other similar criterion.” An amount payable to a lender on specified events such as an IPO and computed as X% of a modified computation of NAV was found by CRA (after referring to its positions on the predecessor of the similarly worded participating interest definition) to be caught as being computed by reference to a similar criterion, i.e., the equity value of the enterprise was a function of profitability and cash flow. A factual finding of Audit that this amount “was used as a substitute for a direct equity investment that the Lender originally wanted but could not acquire” was also germane. Finally, it did not make any difference that the borrower resisted paying the amount, so that what it ended up paying was pursuant to a negotiated settlement of what it owed under the formula.

Neal Armstrong. Summary of 2014-0547431I7 under s. 20(1)(e).